Franklin Financial Network Inc. (Form: 10-Q, Received: 05/09/2019 08:55:21)

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, 2019

☐	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)

Tennessee	20-8839445
(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)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act.


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	FSB	New York Stock Exchange

The number of shares outstanding of the registrant’s common stock, no par value per share, as of May 3, 2019, was 14,729,001.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Cautionary Note Regarding Forward-Looking Statements	1
Item 1. Consolidated Financial Statements (unaudited)	2
Consolidated Balance Sheets	2
Consolidated Statements of Income	3
Consolidated Statements of Comprehensive Income	4
Consolidated Statement of Changes in Shareholders’ Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures About Market Risk	47
Item 4. Controls and Procedures	47

PART II OTHER INFORMATION

Item 1. Legal Proceedings	48
Item 1A. Risk Factors	48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3. Defaults Upon Senior Securities	48
Item 4. Mine Safety Disclosures	48
Item 5. Other Information	48
Item 6. Exhibits	49

SIGNATURES

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined under U.S. federal securities laws. These statements reflect management’s current knowledge, assumptions, beliefs, estimates, and expectations and express management’s current views of future performance, results, and trends and may be identified by their use of terms such as “may,” “likely,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “contemplate,” “seek,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” and other similar terms. Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements. Readers should not place undue reliance on forward-looking statements. Such statements are made as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update such statements after this date, unless otherwise required by law.

Risks and uncertainties that could cause our actual results to differ materially from those described in forward-looking statements include those discussed in our filings with the Securities and Exchange Commission (“SEC”), including those described in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018.

PART I FINANCIA L 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, 2019			December 31, 2018
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	300,113		$	280,212
Certificates of deposit at other financial institutions		3,595			3,594
Securities available for sale		799,301			1,030,668
Securities held to maturity (fair value 2019—$118,866 and 2018—$118,955)		118,831			121,617
Loans held for sale, at fair value		21,730			11,103
Loans held for investment		2,807,377			2,665,399
Allowance for loan losses		(27,857	)		(23,451	)
Net loans		2,779,520			2,641,948
Restricted equity securities, at cost		22,803			21,831
Premises and equipment, net		12,682			12,371
Accrued interest receivable		14,232			13,337
Bank owned life insurance		55,614			55,239
Deferred tax asset		12,208			13,189
Servicing rights, net		3,366			3,403
Goodwill		18,176			18,176
Core deposit intangible, net		807			952
Other assets		75,458			21,799
Total assets	$	4,238,436		$	4,249,439
LIABILITIES AND EQUITY
Deposits
Non-interest bearing	$	304,937		$	290,580
Interest bearing		3,010,906			3,141,227
Total deposits		3,315,843			3,431,807
Federal Home Loan Bank advances		416,500			368,500
Subordinated notes, net		58,738			58,693
Accrued interest payable		5,041			4,700
Other liabilities		58,800			12,906
Total liabilities		3,854,922			3,876,606
Equity
Preferred stock, no par value: 1,000,000 shares authorized; no shares outstanding at March 31, 2019 and December 31, 2018		—			—
Common stock, no par value: 30,000,000 authorized; 14,574,339 and 14,538,085 issued and outstanding at March 31, 2019, and December 31, 2018, respectively		266,758			264,905
Retained earnings		123,250			123,176
Accumulated other comprehensive loss		(6,587	)		(15,341	)
Total shareholders’ equity		383,421			372,740
Non-controlling interest in consolidated subsidiary		93			93
Total equity		383,514			372,833
Total liabilities and equity	$	4,238,436		$	4,249,439

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
Interest income and dividends
Loans, including fees	$	38,338		$	28,793
Securities:
Taxable		6,394			6,111
Tax-Exempt		1,470			1,915
Dividends on restricted equity securities		334			274
Federal funds sold and other		987			954
Total interest income		47,523			38,047
Interest expense
Deposits		16,990			10,643
Federal funds purchased and repurchase agreements		72			96
Federal Home Loan Bank advances		1,959			1,110
Subordinated notes and other borrowings		1,082			1,082
Total interest expense		20,103			12,931
Net interest income		27,420			25,116
Provision for loan losses		5,055			573
Net interest income after provision for loan losses		22,365			24,543
Noninterest income
Service charges on deposit accounts		74			42
Other service charges and fees		757			751
Mortgage banking revenue		1,672			1,549
Wealth management		627			704
Gain on sale or call of securities		149			—
Net (loss) gain on sale of loans		(217	)		9
Net gain on sale of foreclosed assets		4			3
Other		420			398
Total noninterest income		3,486			3,456
Noninterest expense
Salaries and employee benefits		14,743			9,188
Occupancy and equipment		3,113			2,594
FDIC assessment expense		990			660
Marketing		319			280
Professional fees		923			869
Amortization of core deposit intangible		145			104
Other		2,383			1,793
Total noninterest expense		22,616			15,488
Income before income tax expense		3,235			12,511
Income tax expense		334			2,459
Net income		2,901			10,052
Earnings attributable to noncontrolling interest		—			—
Net income available to common shareholders	$	2,901		$	10,052
Earnings per share:
Basic	$	0.20		$	0.76
Diluted		0.19			0.73
Dividend per share	$	0.04		$	—

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
Net income	$	2,901		$	10,052
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period		13,111			(14,577	)
Reclassification adjustment for gains included in net income		(149	)		—
Net unrealized gains (losses)		12,962			(14,577	)
Tax effect, includes $58 and $0, respectively, income tax (benefit) expense from sales of securities		(4,208	)		3,808
Total other comprehensive income (loss)		8,754			(10,769	)
Comprehensive income (loss)	$	11,655		$	(717	)

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three Months Ended March 31, 2019 and March 31, 2018

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

	Shareholders’ Equity
	Preferred		Common Stock						Retained			Accumulated Other Comprehensive			Noncontrolling		Total
	Stock		Shares			Amount			Earnings			Loss			Interest		Equity
Balance at January 1, 2018	$	—		13,237,128		$	222,665		$	88,671		$	(6,786	)	$	103	$	304,653
Exercise of common stock options, includes net settlement of shares		—		21,348			220			—			—			—		220
Stock based compensation expense, net of restricted share forfeitures		—		(334	)		759			—			—			—		759
Stock issued in conjunction with 401(k) employer match, net of distributions		—		—			(50	)		—			—			—		(50	)
Net income		—		—			—			10,052			—			—		10,052
Other comprehensive loss		—		—			—			—			(10,769	)		—		(10,769	)
Balance at March 31, 2018	$	—		13,258,142		$	223,594		$	98,723		$	(17,555	)	$	103	$	304,865
Balance at January 1, 2019	$	—		14,538,085		$	264,905		$	123,176		$	(15,341	)	$	93	$	372,833
Exercise of common stock options, includes net settlement of shares		—		35,046			524			—			—			—		524
Issuance of restricted stock, net of forfeitures		—		1,208			—			—			—			—		—
Stock based compensation expense, net of share forfeitures		—		—			1,329			—			—			—		1,329
Cash dividends - common stock ($0.04 per share)		—		—			—			(583	)		—			—		(583	)
Adjustment for adoption of ASU 2017-08 amortization of premiums		—		—			—			(2,244	)		—			—		(2,244	)
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

See accompanying notes to consolidated financial statements.

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,
	2019			2018
Cash flows from operating activities
Net income	$	2,901		$	10,052
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization on premises and equipment		410			403
Accretion of purchase accounting adjustments		(172	)		(252	)
Net amortization of securities		1,212			1,904
Amortization of loan servicing right asset		225			214
Amortization of core deposit intangible		145			104
Amortization of debt issuance costs		45			44
Provision for loan losses		5,055			573
Deferred income tax (benefit) expense		(2,115	)		10
Excess tax benefit related to stock compensation		(130	)		—
Origination of loans held for sale		(85,008	)		(83,226	)
Proceeds from sale of loans held for sale		75,791			83,622
Net gain on sale of loans held for sale		(1,598	)		(1,439	)
Gain on sale of available for sale securities		(149	)		—
Income from bank owned life insurance		(375	)		(365	)
Stock-based compensation		1,329			759
Deferred gain on sale of loans		(4	)		(4	)
Deferred gain on sale of foreclosed assets		(4	)		(3	)
Net change in:
Accrued interest receivable and other assets		(12,900	)		(1,871	)
Accrued interest payable and other liabilities		3,080			1,896
Net cash from operating activities		(12,262	)		12,421
Cash flows from investing activities
Securities available for sale :
Sales		259,613			—
Purchases		(80,360	)		(224,712	)
Maturities, prepayments and calls		62,050			22,129
Securities held to maturity :
Purchases		—			(1,676	)
Maturities, prepayments and calls		2,448			2,714
Net change in loans		(142,455	)		(53,240	)
Purchase of restricted equity securities		(972	)		(1,114	)
Purchases of premises and equipment, net		(721	)		(63	)
Net cash from investing activities		99,603			(255,962	)
Cash flows from financing activities
(Decrease) increase in deposits		(115,964	)		187,925
Increase in federal funds purchased and repurchase agreements		—			5,067
Proceeds from Federal Home Loan Bank advances		190,000			95,000
Repayment of Federal Home Loan Bank advances		(142,000	)		(50,000	)
Proceeds from exercise of common stock options		524			220
Divestment of common stock issued to 401(k) plan		—			(50	)
Net cash from financing activities		(67,440	)		238,162
Net change in cash and cash equivalents		19,901			(5,379	)
Cash and cash equivalents at beginning of period		280,212			251,543
Cash and cash equivalents at end of period	$	300,113		$	246,164
Supplemental information:
Interest paid	$	19,762		$	12,925
Income taxes paid		1,428			525
Non-cash supplemental information:
Establishment of lease liability and right-of-use asset		43,723			—
Transfers from securities available for sale to securities held to maturity		1,206			—

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included as required by Regulation S-X, Rule 10-01. All such adjustments are of a normal recurring nature. It is suggested that these interim consolidated financial statements and notes be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 19, 2019.

These consolidated financial statements include the accounts of Franklin Financial Network, Inc. (“FFN”), and its wholly-owned subsidiaries, Franklin Synergy Bank (“Franklin Synergy” or the “Bank”) and Franklin Synergy Risk Management, Inc. (collectively, the “Company”). Franklin Synergy Investments of Tennessee, Inc., Franklin Synergy Investments of Nevada, Inc., and Franklin Synergy Preferred Capital, Inc. are direct or indirect subsidiaries of the Bank and are included in these consolidated financial statements. Significant intercompany transactions and accounts are eliminated in consolidation.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases which requires recognition in the statement of financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.

The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized for operating leases. The guidance became effective for the Company on January 1, 2019. In July 2016, the FASB issued Accounting Standards Update 2018-10, Codification Improvements to Topic 842,

Leases which provides technical corrections and improvements to ASU 2016-02. In July 2016, the FASB issued Accounting Standards Update 2018-11, Leases (Topic 842): Targeted Improvements which provides an optional transition method to adopt the new requirements of ASU 2016-02 as of the adoption date with no adjustment to the presentation or disclosure of comparative prior periods included in the financial statements in the period of adoption. The Company elected the optional transition method on January 1, 2019, which will result in presentation of periods prior to adoption under the prior lease guidance of ASC Topic 840. In December 2018, the FASB issued Accounting Standards Update 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors . ASU 2018-20 permits lessors to account for certain taxes as lessee costs, permits lessors to exclude from revenue certain lessor costs paid by lessees directly to third parties, and requires lessors to allocate certain variable payments to lease and non-lease components. See Note 5 Leases for more information.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities . These amendments shorten the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance became effective for the Company on January 1, 2019, and using a modified retrospective transition adoption approach, we recognized a cumulative effect reduction to retain earnings totaling $2,244.

ASU 2018-16, “Derivatives and Hedging (Topic 815) - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this update permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct U.S. Treasury obligations, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. ASU 2018-16 became effective for us on January 1, 2019 and did not have a significant impact on our financial statements.

In March 2019, the FASB issued ASU No. 2019-01, “Leases: Codification Improvements.” This ASU (1) states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there isn’t a significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC 942 (such as the Company) must classify principal payments received from sales-type and direct financing leases in investing activities in the statement of cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of ASU No. 2016-02, the Company elected to early adopt ASU 2019-01 on January 1, 2019. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018; however, the Company does not currently plan to early adopt this ASU. The Company is currently gathering information and working to determine the methodology to be used. The Company is gathering as much data as possible to enable review scenarios and to determine which calculations will produce the most reliable results. The Company is still evaluating the impact of this new guidance on our financial statements; however an increase in the overall ALLL is likely upon adoption to provide for expected credit losses over the life of the loan portfolio.

In January 2017, the FASB issued ASU 2017-04, “ Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment .” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. Adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.

ASU 2018-14, “ Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20) .” ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

ASU 2018-15, “ Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract .” ASU 2018-15 clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 will be effective for us on January 1, 2020, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

NO TE 2 —SECURITIES

The following table summarizes the amortized cost and fair value of the securities available for sale portfolio at March 31, 2019 and December 31, 2018 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2019
U.S. Treasury securities	$	69,548	$	70	$	—		$	69,618
U.S. government sponsored entities and agencies		1,829		1		(10	)		1,820
Mortgage-backed securities: residential		531,551		387		(8,480	)		523,458
Asset-backed securities		25,745		—		(695	)		25,050
Corporate notes		17,878		123		(62	)		17,939
State and political subdivisions		160,556		2,087		(1,227	)		161,416
Total	$	807,107	$	2,668	$	(10,474	)	$	799,301

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2018
U.S. Treasury securities	$	253,015	$	59	$	(60	)	$	253,014
U.S. government sponsored entities and agencies		21,999		1		(112	)		21,888
Mortgage-backed securities: residential		596,766		27		(16,094	)		580,699
Asset-backed securities		25,744		—		(900	)		24,844
Corporate notes		12,480		21		(77	)		12,424
State and political subdivisions		141,432		863		(4,496	)		137,799
Total	$	1,051,436	$	971	$	(21,739	)	$	1,030,668

The amortized cost and fair value of the securities held to maturity portfolio at March 31, 2019 and December 31, 2018 and the corresponding amounts of gross unrecognized gains and losses were as follows:

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
March 31, 2019
Mortgage backed securities: residential	$	73,865	$	85	$	(1,968	)	$	71,982
State and political subdivisions		44,966		1,918		—			46,884
Total	$	118,831	$	2,003	$	(1,968	)	$	118,866
December 31, 2018
Mortgage backed securities: residential	$	75,944	$	34	$	(3,072	)	$	72,906
State and political subdivisions		45,673		466		(90	)		46,049
Total	$	121,617	$	500	$	(3,162	)	$	118,955

The proceeds from sales and calls of securities available for sale and the associated gains and losses were as follows:

	Three Months Ended March 31,
	2019			2018
Proceeds	$	259,613		$	—
Gross gains		1,801			—
Gross losses		(1,652	)		—

The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	March 31, 2019
	Amortized Cost		Fair Value
Available for sale
One year or less	$	70,053	$	70,122
Over one year through five years		1,080		1,078
Over five years through ten years		21,576		21,663
Over ten years		157,102		157,930
Asset-backed securities		25,745		25,050
Mortgage-backed securities: residential		531,551		523,458
Total	$	807,107	$	799,301
Held to maturity
Over one year through five years		1,106		1,128
Over five years through ten years		1,039		1,073
Over ten years		42,821		44,683
Mortgage-backed securities: residential		73,865		71,982
Total	$	118,831	$	118,866

Securities pledged at March 31, 2019 and December 31, 2018 had a carrying amount of $711,826 and $939,440, respectively, and were pledged to secure public deposits.

At March 31, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. government-sponsored entities and agencies, in an amount greater than 10% of shareholders’ equity.

The following table summarizes the securities with unrealized and unrecognized losses at March 31, 2019 and December 31, 2018, aggregated by major security type and length of time in a continuous unrealized loss position:

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2019
Available for sale
U.S. government sponsored entities and agencies	$	344	$	(1	)	$	1,021	$	(9	)	$	1,365	$	(10	)
Mortgage-backed securities: residential		—		—			444,647		(8,480	)		444,647		(8,480	)
Asset-backed securities		25,050		(695	)		—		—			25,050		(695	)
Corporate		6,329		(62	)		—		—			6,329		(62	)
State and political subdivisions		509		(1	)		60,318		(1,226	)		60,827		(1,227	)
Total available for sale	$	32,232	$	(759	)	$	505,986	$	(9,715	)	$	538,218	$	(10,474	)

	Less Than 12 Months				12 Months or Longer					Total
	Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses
Held to maturity
Mortgage-backed securities: residential	$	—	$	—	$	66,578	$	(1,968	)	$	66,578	$	(1,968	)
Total held to maturity	$	—	$	—	$	66,578	$	(1,968	)	$	66,578	$	(1,968	)

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2018
Available for sale
U.S. Treasury securities	$	163,722	$	(60	)	$	—	$	—		$	163,722	$	(60	)
U.S. government sponsored entities and agencies		1,355		(12	)		19,937		(100	)		21,292		(112	)
Mortgage-backed securities: residential		83,203		(755	)		490,752		(15,339	)		573,955		(16,094	)
Asset-backed securities		24,845		(900	)		—		—			24,845		(900	)
Corporate		9,839		(77	)		—		—			9,839		(77	)
State and political subdivisions		10,446		(106	)		69,238		(4,390	)		79,684		(4,496	)
Total available for sale	$	293,410	$	(1,910	)	$	579,927	$	(19,829	)	$	873,337	$	(21,739	)

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses
Held to maturity
Mortgage-backed securities: residential	$	2,239	$	(40	)	$	68,067	$	(3,032	)	$	70,306	$	(3,072	)
State and political subdivisions		8,362		(39	)		3,675		(51	)		12,037		(90	)
Total held to maturity	$	10,601	$	(79	)	$	71,742	$	(3,083	)	$	82,343	$	(3,162	)

Unrealized losses on debt securities have not been recognized into income because the issuers’ bonds are of high credit quality (rated AA or higher). As of March 31, 2019, management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the bonds approach maturity.

NOTE 3—LOANS

Loans at March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019			December 31, 2018
Loans that are not PCI loans
Construction and land development	$	581,340		$	584,440
Commercial real estate:
Nonfarm, nonresidential		852,838			754,243
Other		40,652			48,017
Residential real estate:
Closed-end 1-4 family		497,160			492,989
Other		197,030			189,817
Commercial and industrial		635,417			590,854
Consumer and other		4,448			5,568
Loans before net deferred loan fees		2,808,885			2,665,928
Deferred loan fees, net		(3,528	)		(2,544	)
Total loans that are not PCI loans		2,805,357			2,663,384
Total PCI loans		2,020			2,015
Allowance for loan losses		(27,857	)		(23,451	)
Total loans, net of allowance for loan losses	$	2,779,520		$	2,641,948

The following table presents the activity in the allowance for loan losses by portfolio segment for the three-month periods ended March 31, 2019 and 2018 :

	Construction and Land Development			Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer and Other			Total
Three Months Ended March 31, 2019
Allowance for loan losses:
Beginning balance	$	4,743		$	6,725		$	4,743		$	7,166		$	74		$	23,451
Provision for loan losses		(1	)		302			80			4,631			43			5,055
Loans charged-off		—			—			(15	)		(568	)		(70	)		(653	)
Recoveries		—			—			2			—			2			4
Total ending allowance balance	$	4,742		$	7,027		$	4,810		$	11,229		$	49		$	27,857
Three Months Ended March 31, 2018
Allowance for loan losses:
Beginning balance	$	3,802		$	5,981		$	3,834		$	7,587		$	43		$	21,247
Provision for loan losses		582			(106	)		(241	)		328			10			573
Loans charged-off		(39	)		—			(7	)		(49	)		(11	)		(106	)
Recoveries		—			—			19			—			5			24
Total ending allowance balance	$	4,345		$	5,875		$	3,605		$	7,866		$	47		$	21,738

As of both March 31, 2019 and December 31, 2018, there was no allowance for loan losses for PCI loans.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2019 and December 31, 2018. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and net deferred loan fees due to immateriality.

	Construction and Land Development		Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
March 31, 2019
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	3,455	$	—	$	3,455
Collectively evaluated for impairment		4,742		7,027		4,810		7,774		49		24,402
Purchased credit-impaired loans		—		—		—		—		—		—
Total ending allowance balance	$	4,742	$	7,027	$	4,810	$	11,229	$	49	$	27,857
Loans:
Individually evaluated for impairment	$	583	$	—	$	1,811	$	9,177	$	—	$	11,571
Collectively evaluated for impairment		580,757		893,490		692,379		626,240		4,448		2,797,314
Purchased credit-impaired loans		—		—		74		1,946		—		2,020
Total ending loans balance	$	581,340	$	893,490	$	694,264	$	637,363	$	4,448	$	2,810,905
December 31, 2018
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	17	$	—	$	17
Collectively evaluated for impairment		4,743		6,725		4,743		7,149		74		23,434
Total ending allowance balance	$	4,743	$	6,725	$	4,743	$	7,166	$	74	$	23,451
Loans:
Individually evaluated for impairment	$	2,298	$	—	$	3,189	$	167	$	—	$	5,654
Collectively evaluated for impairment		582,142		802,260		679,617		590,687		5,568		2,660,274
Purchased credit-impaired loans		—		—		76		1,939		—		2,015
Total ending loans balance	$	584,440	$	802,260	$	682,882	$	592,793	$	5,568	$	2,667,943

Loans collectively evaluated for impairment reported at March 31, 2019 include certain acquired loans. At March 31, 2019 , these non-PCI loans had a carrying value of $ 92 ,0 50 , comprised of contractually unpaid principal totaling $ 93 , 133 and discount s totaling $1, 083 . Management evaluated these loans for credit deterioration since acquisition and determined that an allowance for loan losses of $ 1 69 was necessary at March 31, 2019 .

The following table presents information related to impaired loans by class of loans as of March 31, 2019 and December 31, 2018:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
March 31, 2019
With no allowance recorded:
Construction and land development	$	599	$	583	$	—
Residential real estate:
Closed-end 1-4 family		884		849		—
Other		996		962		—
Subtotal		2,479		2,394		—
With an allowance recorded:
Commercial and industrial		9,177		9,177		3,455
Subtotal		9,177		9,177		3,455
Total	$	11,656	$	11,571	$	3,455
December 31, 2018
With no allowance recorded:
Construction and land development	$	2,298	$	2,298	$	—
Residential real estate:
Closed-end 1-4 family		1,272		1,272		—
Other		1,917		1,917		—
Subtotal		5,487		5,487		—
With an allowance recorded:
Commercial and industrial		167		167		17
Subtotal		167		167		17
Total	$	5,654	$	5,654	$	17

The following table presents the average recorded investment of impaired loans by class of loans for the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
Average Recorded Investment	2019		2018
With no allowance recorded:
Construction and land development	$	768	$	367
Commercial real estate:
Nonfarm, nonresidential		51		—
Residential real estate:
Closed-end 1-4 family		806		420
Other		1,264		372
Commercial and industrial		—		626
Subtotal		2,889		1,785
With an allowance recorded:
Construction and land development		183		—
Commercial and industrial		3,170		1,785
Subtotal		3,353		1,785
Total average recorded investment	$	6,242	$	3,570

The impact on net interest income for these loans was not material to the Company’s results of operations for the three months ended March 31, 2019 and 2018 .

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of March 31, 2019 and December 31, 2018:

	Nonaccrual		Loans Past Due Over 90 Days
March 31, 2019
Construction and land development	$	583	$	—
Commercial real estate:
Non-farm non-residential		153		—
Residential real estate:
Closed-end 1-4 family		849		—
Other		962		—
Commercial and industrial		9,177		180
Total	$	11,724	$	180
December 31, 2018
Construction and land development	$	2,298	$	—
Residential real estate:
Closed-end 1-4 family		1,273		—
Other		1,917		—
Commercial and industrial		—		208
Total	$	5,488	$	208

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the aging of the recorded investment in past due loans as of March 31, 2019 and December 31, 2018 by class of loans:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		PCI Loans		Total
March 31, 2019
Construction and land development	$	139	$	—	$	—	$	139	$	581,201	$	—	$	581,340
Commercial real estate:
Nonfarm, nonresidential		—		—		—		—		852,838		—		852,838
Other		—		—		—		—		40,652		—		40,652
Residential real estate:
Closed-end 1-4 family		1,135		11		—		1,146		496,014		74		497,234
Other		88		—		—		88		196,942		—		197,030
Commercial and industrial		522		622		180		1,324		634,093		1,946		637,363
Consumer and other		—		—		—		—		4,448		—		4,448
	$	1,884	$	633	$	180	$	2,697	$	2,806,188	$	2,020	$	2,810,905
December 31, 2018
Construction and land development	$	294	$	1,986	$	548	$	2,828	$	581,612	$	—	$	584,440
Commercial real estate:
Nonfarm, nonresidential		515		—		—		515		753,728		—		754,243
Other		—		—		—		—		48,017		—		48,017
Residential real estate:
Closed-end 1-4 family		2,390		404		228		3,022		489,967		76		493,065
Other		142		—		1,810		1,952		187,865		—		189,817
Commercial and industrial		241		252		208		701		590,153		1,939		592,793
Consumer and other		—		—		—		—		5,568		—		5,568
	$	3,582	$	2,642	$	2,794	$	9,018	$	2,656,910	$	2,015	$	2,667,943

Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans as well as non-homogeneous residential real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are con sidered to be pass-rated loans. The following table excludes deferred loan fees and includes PCI loans, which are included in the “Substandard” column. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of March 31, 2019 and December 31, 2018 :

	Pass		Special Mention		Substandard		Total
March 31, 2019
Construction and land development	$	580,325	$	432	$	583	$	581,340
Commercial real estate:
Nonfarm, nonresidential		848,221		4,464		153		852,838
Other		40,033		619		—		40,652
Residential real estate:
Closed-end 1-4 family		492,921		1,567		2,746		497,234
Other		194,675		404		1,951		197,030
Commercial and industrial		596,529		8,519		32,315		637,363
Consumer and other		4,448		—		—		4,448
	$	2,757,152	$	16,005	$	37,748	$	2,810,905

	Pass		Special Mention		Substandard		Total
December 31, 2018
Construction and land development	$	580,468	$	1,416	$	2,556	$	584,440
Commercial real estate:
Nonfarm, nonresidential		739,469		14,774		—		754,243
Other		48,017		—		—		48,017
Residential real estate:
Closed-end 1-4 family		489,781		948		2,336		493,065
Other		186,485		404		2,928		189,817
Commercial and industrial		553,589		8,313		30,891		592,793
Consumer and other		5,567		1		—		5,568
	$	2,603,376	$	25,856	$	38,711	$	2,667,943

Troubled Debt Restructurings

As of March 31, 2019, the Company’s loan portfolio contains one loan that has been modified in a troubled debt restructuring with a balance of $319. As of December 31, 2018, the Company’s loan portfolio contained two loans that had been modified in a troubled debt restructuring with a balance of $490. During the three months ended March 31, 2019, one of the loans that was a troubled debt restructuring at December 31, 2018 was fully charged off with $159 of the loan balance being recognized as a charge-off.

NOTE 4—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at March 31, 2019 and December 31, 2018 are as follows:

	March 31, 2019		December 31, 2018
Loan portfolios serviced for:
Federal Home Loan Mortgage Corporation	$	494,025	$	492,761
Other		3,651		3,689

The components of net loan servicing fees for the three months ended March 31, 2019 and 2018 were as follows:

	Three Months Ended March 31,
	2019			2018
Loan servicing fees, net:
Loan servicing fees	$	306		$	333
Amortization of loan servicing fees		(225	)		(214	)
Change in impairment		—			—
Total	$	81		$	119

The fair value of servicing rights was estimated by management to be approximately $4,329 at March 31, 2019. Fair value for March 31, 2019 was determined using a weighted average discount rate of 9.5% and a weighted average prepayment speed of 13.9%. At December 31, 2018, the fair value of servicing rights was estimated by management to be approximately $4,836. Fair value for December 31, 2018 was determined using a weighted average discount rate of 9.5% and a weighted average prepayment speed of 11.9%.

NOTE 5—LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. The leases are presented as of part of other assets and other liabilities on the consolidated balance sheet.

Lessee Accounting

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches and office space with terms extending through 2033. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated statements of condition. Upon adoption of FASB ASU 2016-02 Leases on January 1, 2019, the Company began recognizing right-of-use assets and lease liabilities related to its operating leases. Prior to ASU 2016-02, such assets and liabilities were recognized only for capital leases (referred to as finance leases under the amendments of ASU 2016-02). In accordance with the optional transition method allowed by ASU 2016-11, comparative prior period information included within this note is presented in accordance with guidance in effect during those periods. The Company has one existing finance lease for additional office space with a lease term through 2033. As this lease was previously required to be recorded on the Company’s consolidated statements of condition, and was recorded in other assets and other liabilities, Topic 842 did not materially impact the accounting for this lease. Subsequent to March 31, 2019, one additional lease agreement has been executed with the plan to relocate one branch in Williamson County, Tennessee.

The following table represents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of condition.

Lease right-of-use assets	Classification	March 31, 2019
Operating lease right-of-use assets	Other Assets	$	41,652
Finance lease right-of-use assets	Other Assets		2,970
Total lease right-of-use assets		$	44,622

Lease liabilities	Classification	March 31, 2019
Operating lease right-of-use assets	Other Liabilities	$	43,163
Finance lease right-of-use assets	Other Liabilities		3,023
Total lease liabilities		$	46,186

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more o ptions to renew at the Company’s discretion, which will be determined within the timeframe of the lease agreement, and not included within the calculated ROU. The Company utilizes the discount rate implicit in the lease whenever this rate is readily determ inable. As this rate is rarely determinable, the Company calculated a blended rate consisting of the F ederal Home Loan Bank’s rate matching to the duration of the lease (over-collateralized borrowing rate) and the offering rate of the Company’s most recent subordinated debt offering in June of 2016. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of Janu ary 1, 2019, was used. For the C ompany’s only finance lease that commenced December 2018, the Company utili zed its blended rate calculation based on the term of the lease.

Weighted-average remaining lease term									March 31, 2019
Operating leases									14.8 years
Finance lease									11.9 years

Weighted-average discount rate
Operating leases									5.49%
Finance lease									5.48%

The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.

Lease costs
Operating lease cost	$	1,262
Variable lease cost		99
Short-term lease cost		24
Finance lease cost
Interest on lease liabilities ⁽¹⁾		41
Amortization of right-of-use asset		50
Total lease cost	$	1,476

⁽¹⁾

Included in other borrowings interest expense in the Company's consolidated statement of income. All other lease costs in this table are included

in net occupancy expense .

Rent expense related to leases during the three months ended March 31, 2018, was $1,228.

Other supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,138
Operating cash flows from finance leases		41
Financing cash flows from finance leases		27

Future minimum payments for a finance lease and operating leases with initial or remaining terms of one year of more as of March 31, 2019.

Twelve Months Ended:	Finance			Operating
2020	$	273		$	4,794
2021		277			4,868
2022		281			4,865
2023		285			4,853
2024		289			4,903
Thereafter		3,059			34,946
Total future minimum lease payments	$	4,464		$	59,229
Less: Imputed interest		(1,441	)		(16,066	)
Total lease liabilities	$	3,023		$	43,163

Future minimum payments for a finance lease and operating leases with initial or remaining terms of one year of more as of December 31, 2018.

Twelve Months Ended:	Finance		Operating
2019	$	272	$	4,841
2020		276		4,849
2021		280		4,871
2022		284		4,856
2023		288		4,885
Thereafter		3,133		36,178
Total future minimum lease payments	$	4,533	$	60,480

NOTE 6—SHARE-BASED PAYMENTS

The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $1,329 and $759 for the three months ended March 31, 2019 and 2018, respectively. The total income tax benefit, which is shown on the Consolidated Statements of Income as a reduction of income tax expense, was $113 and $63 for the three months ended March 31, 2019 and 2018, respectively.

Stock Options : The Company’s 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), as amended and shareholder-approved, provided for authorized shares up to 4,000,000. The 2007 Plan provided that no options intended to be ISOs may be granted after April 9, 2017. As a result, the Company’s board of directors approved, and recommended to its shareholders for approval, an equity incentive plan, the 2017 Omnibus Equity Incentive Plan which the Company’s shareholders approved at the 2017 annual meeting of shareholders. On April 12, 2018, the Compensation Committee of the Company’s Board of Directors approved the Amended and Restated 2017 Omnibus Equity Incentive Plan to make certain changes in response to feedback received from our shareholders. The terms of the Amended and Restated 2017 Plan are substantially similar to the terms of the 2007 Plan it was intended to replace. The Amended and Restated 2017 Plan provides for authorized shares up to 3,500,000. At March 31, 2019, there were 2,481,835 authorized shares available for issuance under the Amended and Restated 2017 Plan.

Employee, organizer and director awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have a ten-year contractual term with varying vesting requirements. The Company assigns discretion to its Board of Directors to make grants either as qualified incentive stock options or as non-qualified stock options. All employee grants are intended to be treated as qualified incentive stock options, if allowable. All other grants are expected to be treated as non-qualified.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected stock price volatility is based on historical volatilities of the Company. The Company uses historical data to estimate option exercise and post-vesting termination behavior.

The expected term of options granted represents the period of time that options granted are expected to be outstanding, which t akes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted was determined using the following weighted-average assumptions as of grant date.

	March 31, 2019			March 31, 2018
Risk-free interest rate		2.31	%		2.49	%
Expected term	7 years			7.5 years
Expected stock price volatility		30.44	%		32.48	%
Dividend yield		0.50	%		0.00	%

The weighted average fair value of options granted for the three months ended March 31, 2019 and 2018 were $10.01 and $14.77, respectively.

A summary of the activity in the plans for the three months ended March 31, 2019 follows:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2018		1,807,922		$	24.68		6.41	$	9,581
Granted		30,000			27.72
Exercised		(35,046	)		14.93
Forfeited, expired, or cancelled		—
Outstanding at period end		1,802,876		$	24.92		8.11	$	7,375
Vested or expected to vest		1,712,732		$	24.92		8.11	$	7,006
Exercisable at period end		843,174		$	14.02		7.96	$	10,567

	For the Three Months Ended March 31,
	2019		2018
Stock options exercised:
Intrinsic value of options exercised	$	623	$	511
Cash received from options exercised		524		220
Tax benefit realized from option exercises		113		63

As of March 31, 2019 and 2018, there was $5,306 and $5,708, respectively, of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized over a weighted-average period of 1.1 years.

Restricted Stock : Additionally, the 2007 Plan and the Amended and Restated 2017 Plan each provides for the granting of restricted share awards and other performance related incentives. When the restricted shares are awarded, a participant receives voting and dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. These awards typically have a vesting period of three to five years and vest in equal annual installments on the anniversary date of the grant.

A summary of activity for non-vested restricted share awards for the three months ended March 31, 2019 is as follows:

Non-vested Shares	Shares			Weighted- Average Grant- Date Fair Value
Non-vested at December 31, 2018		176,516		$	31.07
Granted		1,255			31.87
Vested		(10,421	)		31.09
Forfeited		(47	)		32.95
Non-vested at March 31, 2019		167,303

Compensation expense associated with the restricted share awards is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. As of March 31, 2019 and 2018, there was $2,028 and $1,580, respectively, of total unrecognized compensation cost related to non-vested shares granted under the 2007 Plan and Amended and Restated 2017 Plan. The cost is expected to be recognized over a weighted-average period of 1.5 years.

NOTE 7—REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company on January 1, 2016 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.

The Basel III rules additionally provide for countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under the Basel III rules, banks must maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital equal to 2.5% of risk-weighted assets above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying certain discretionary bonuses. This new capital conservation buffer requirement was phased in beginning January 2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% in January 2019.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Management believes that, as of March 31, 2019, the Company and Bank met all capital adequacy requirements to which they are subject. There are no conditions or events since that notification that management believes have changed the institution’s category.

Actual and required capital amounts a nd ratios are presented below as of March 31, 2019 and December 31, 2018 for the Company and Bank:

	Actual					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2019
Company-Level
Company common equity Tier 1 capital to RWA	$	369,202		11.3	%	$	146,855		4.5	%	N/A		N/A
Company Total Capital to RWA	$	455,881		14.0	%	$	261,076		8.0	%	N/A		N/A
Company Tier 1 (Core) Capital to RWA	$	369,202		11.3	%	$	195,807		6.0	%	N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	369,202		8.8	%	$	168,498		4.0	%	N/A		N/A
Bank-Level
Bank common equity Tier 1 capital to RWA	$	425,528		13.0	%	$	146,869		4.5	%	$	212,144		6.5	%
Bank Total Capital to RWA	$	453,469		13.9	%	$	261,101		8.0	%	$	326,376		10.0	%
Bank Tier 1 (Core) Capital to RWA	$	425,528		13.0	%	$	195,825		6.0	%	$	261,101		8.0	%
Bank Tier 1 (Core) Capital to average assets	$	425,528		10.1	%	$	168,318		4.0	%	$	210,397		5.0	%
December 31, 2018
Company-Level
Company common equity Tier 1 capital to RWA	$	367,096		12.2	%	$	135,598		4.5	%	N/A		N/A
Company Total Capital to RWA	$	449,325		14.9	%	$	241,064		8.0	%	N/A		N/A
Company Tier 1 (Core) Capital to RWA	$	367,096		12.2	%	$	180,798		6.0	%	N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	367,096		8.8	%	$	167,553		4.0	%	N/A		N/A
Bank-Level
Bank common equity Tier 1 capital to RWA	$	421,335		14.0	%	$	135,613		4.5	%	$	195,886		6.5	%
Bank Total Capital to RWA	$	444,871		14.8	%	$	241,090		8.0	%	$	301,363		10.0	%
Bank Tier 1 (Core) Capital to RWA	$	421,335		14.0	%	$	180,818		6.0	%	$	241,090		8.0	%
Bank Tier 1 (Core) Capital to average assets	$	421,335		10.1	%	$	167,420		4.0	%	$	209,275		5.0	%

Note: Minimum ratios presented exclude the capital conservation buffer

Dividend Restrictions : The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above.

NOTE 8—DERIVATIVES INSTRUMENTS

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

Derivatives designated as fair value hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities.

During 2019, the Company entered into sixteen swap transactions with a notional amount of $101.2 million designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the fair values of fixed rate securities.

A summary of the Company's fair value hedge relationships as of March 31, 2019 are as follows (in thousands):

March 31, 2019

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Liability derivative

Interest rate swap agreements - securities

Other liabilities

7.59

2.528%

3 month LIBOR

101,205

(1,118

)

There were no fair value hedge relationships as of December 31, 2018.

The effects of fair value hedge relationships reported in interest income on securities on the consolidated statements of income for the three months ended March 31, 2019 and 2018 were as follows (in thousands):

	Three Months Ended March 31,
Gain (loss) on fair value hedging relationship	2019			2018
Interest rate swap agreements - securities:
Hedged items	$	1,118		$	-
Derivative designated as hedging instruments		(1,118	)		-

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at March 31, 2019:

	Carrying Amount of the Hedged Assets (in thousands)		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
Line item on the balance sheet	March 31, 2019		March 31, 2019
Securities available-for-sale	$	116,634	$	1,118

NOTE 9—FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Securities : The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded and values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Included in securities is interest rate swap agreements. The carrying amount of the interest rate swap agreements is based on pricing models that utilize observable market inputs (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Other Assets : Included in other assets are certain assets carried at fair value and interest rate locks associated with the mortgage loan pipeline. The fair value of the mortgage loan pipeline rate locks is based upon the projected sales price of the underlying loans, taking into account market interest rates and other market factors at the measurement date, net of the projected fallout rate. These assets are valued using similar observable data that occurs in the market. (Level 2).

Impaired Loans : The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Appraisals for impaired loans are generally obtained annually but may be obtained more frequently based on changing circumstances as part of the aforementioned quarterly evaluation.

Foreclosed Assets : Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with in dependent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment sho uld be made to the appraisal value to arrive at fair value.

Loans Held For Sale : The Company has elected the fair value option for loans held for sale to align with other accounting policies related to mortgage banking, such as mortgage banking derivatives. These loans are typically sold to an investor following loan origination and the fair value of such accounts are readily available based on direct quotes from investors or similar transactions experienced in the secondary loan market. Fair value adjustments, as well as realized gains and losses are recorded in current earnings. Fair value is determined by market prices for similar transactions adjusted for specific attributes of that loan (Level 2).

Other Liabilities : The Company has certain liabilities carried at fair value including certain interest rate swap agreements to facilitate customer transactions and the interest rate locks associated with the funding for its mortgage loan originations. The fair value of these liabilities is based on pricing models that utilize observable market inputs (Level 2).

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

	Fair Value Measurements at March 31, 2019 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Securities available for sale
U.S. Treasury securities	$	69,618	$	—	$	—
U.S. government sponsored entities and agencies		—		1,820		—
Mortgage-backed securities-residential		—		523,458		—
Asset-backed securities		—		25,050		—
Corporate notes		—		17,939		—
State and political subdivisions		—		161,416		—
Total securities available for sale	$	69,618	$	729,683	$	—
Loans held for sale	$	—	$	21,730	$	—
Other assets	$	—	$	190	$	—
Financial Liabilities
Other liabilities	$	—	$	1,331	$	—

	Fair Value Measurements at December 31, 2018 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Securities available for sale
U.S. Treasury securities	$	253,014	$	—	$	—
U.S. government sponsored entities and agencies		—		21,888		—
Mortgage-backed securities-residential		—		580,699		—
Asset-backed securities		—		24,844		—
Corporate notes				12,424
State and political subdivisions		—		137,799		—
Total securities available for sale	$	253,014	$	777,654	$	—
Loans held for sale	$	—	$	11,103	$	—
Other assets	$	—	$	206	$	—
Financial Liabilities
Other liabilities	$	—	$	129	$	—

As of March 31, 2019, the unpaid principal balance of loans held for sale was $21,079 resulting in an unrealized gain of $651 included in mortgage banking revenue. As of December 31, 2018, the unpaid principal balance of loans held for sale was $10,722, resulting in an unrealized gain of $381 included in mortgage banking revenue. For the three months ended March 31, 2019 and 2018, the change in fair value related to loans held for sale, which is included in mortgage banking revenue, was $270 and ($26), respectively. None of these loans were 90 days or more past due or on nonaccrual as of March 31, 2019 and December 31, 2018.

There were no transfers between level 1 and 2 during 2019 or 2018.

Assets measured at fair value on a non-recurring basis are summarized below:

There were six collateral-dependent impaired loans carried at fair value of $5,722 as of March 31, 2019. The level 3 fair value measurement for these assets measured at fair value on a non-recurring basis used the income approach with an adjustment for differences in net operating income expectations based on an unobservable input of earnings before interest, tax, depreciation and amortization (EBITDA). There was one collateral-dependent impaired loan carried at fair value of $150 as of December 31, 2018. For the three months ended March 31, 2019, $3,455 in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral. For the three months ended March 31, 2018, $0 in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral.

Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $0 as of March 31, 2019 and December 31, 2018, respectively. There were no properties at March 31, 2019 or 2018 that had required write-downs to fair value.

The carrying amounts and estimated fair values of financial instruments at March 31, 2019 and December 31 , 2018 are as follows:

			Fair Value Measurements at March 31, 2019 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	300,113	$	300,113	$	—	$	—	$	300,113
Certificates of deposit held at other financial institutions		3,595		—		3,601		—		3,601
Securities available for sale		799,301		69,618		729,683		—		799,301
Securities held to maturity		118,831		—		118,866		—		118,866
Loans held for sale		21,730		—		21,730		—		21,730
Net loans		2,779,520		—		—		2,781,888		2,781,888
Servicing rights, net		3,366		—		—		4,329		4,329
Other assets		190		—		190		—		190
Accrued interest receivable		14,232		140		5,151		8,941		14,232
Financial liabilities
Deposits	$	3,315,843	$	2,201,698	$	1,112,151	$	—	$	3,313,849
Federal Home Loan Bank advances		416,500		—		415,845		—		415,845
Subordinated notes, net		58,738		—		—		60,426		60,426
Other liabilities		1,331		—		1,331		—		1,331
Accrued interest payable		5,041		205		350		4,486		5,041

			Fair Value Measurements at December 31, 2018 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	280,212	$	280,212	$	—	$	—	$	280,212
Certificates of deposit held at other financial institutions		3,594		—		3,594		—		3,594
Securities available for sale		1,030,668		253,014		777,654		—		1,030,668
Securities held to maturity		121,617		—		118,955		—		118,955
Loans held for sale		11,103		—		11,103		—		11,103
Net loans		2,641,948		—		—		2,622,386		2,622,386
Servicing rights, net		3,403		—		—		4,836		4,836
Other assets		206		—		206		—		206
Accrued interest receivable		13,337		71		5,539		7,727		13,337
Financial liabilities
Deposits	$	3,431,807	$	2,105,951	$	1,319,326	$	—	$	3,425,277
Federal Home Loan Bank advances		368,500		—		366,786		—		366,786
Subordinated notes, net		58,693		—		—		59,852		59,852
Other liabilities		129		—		129		—		129
Accrued interest payable		4,700		146		3,866		688		4,700

The methods and assumptions not previously described used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: In accordance with ASU 2016-01, the fair value of loans held for investment, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using a cash flow projection methodology that relies on three primary assumptions: (1) the expected prepayment rate of loans; (2) the magnitude of future net losses based on expected default rate and severity of loss; and (3) the discount rate applicable to the expected cash flows of the loan portfolio. Loans are considered a Level 3 classification.

(c ) Mortgage Servicing Rights: Fair value of mortgage s ervicing rights is based on valuation models that calculate the present value of estimated net cash flows based on industry market data. The valuation model incorporates assumptions that market participants would use in estimating future net cash flows res ulting in a Level 3 classification.

(d) Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(e) Federal Funds Purchased and Repurchase Agreements: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

(f) Federal Home Loan Bank Advances: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Subordinated Notes: The fair values of the Company’s subordinated notes are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(h) Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the asset/liability with which they are associated.

(i) Off-balance Sheet Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

NOTE 10—EARNINGS PER SHARE

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. The factors used in the earnings per share computation follow:

	Three Months Ended March 31,
	2019			2018
Basic
Net income available to common shareholders	$	2,901		$	10,052
Less: earnings allocated to participating securities		(34	)		(71	)
Net income allocated to common shareholders	$	2,867		$	9,981
Weighted average common shares outstanding including participating securities		14,561,721			13,249,728
Less: Participating securities		(168,638	)		(94,010	)
Average shares		14,393,083			13,155,718
Basic earnings per common share	$	0.20		$	0.76

	Three Months Ended March 31,
	2019		2018
Diluted
Net income allocated to common shareholders	$	2,867	$	9,981
Weighted average common shares outstanding for basic earnings per common share		14,393,083		13,155,718
Add: Dilutive effects of assumed exercises of stock options		411,747		516,666
Add: Dilutive effects of assumed exercises of stock warrants		—		—
Average shares and dilutive potential common shares		14,804,830		13,672,384
Dilutive earnings per common share	$	0.19	$	0.73

For three months ended March 31, 2019 and 2018 , stock options for 768,458 and 411,279 shares of common stock, respectively, were not considered in computing diluted earnings per common share because they were antidilutive.

NOTE 11—SUBORDINATED DEBT ISSUANCE

The Company’s subordinated notes, net of issuance costs, totaled $58,738 and $58,693 at March 31, 2019 and at December 31, 2018, respectively. For regulatory capital purposes, the subordinated notes are treated as Tier 2 capital, subject to certain limitations, and are included in total regulatory capital when calculating the Company’s total capital to risk weighted assets ratio as indicated in Note 7 of these consolidated financial statements.

The Company completed the issuance of $60,000 in principal amount of subordinated notes in two separate offerings. In March 2016, $40,000 of 6.875% fixed-to-floating rate subordinated notes (the “March 2016 Subordinated Notes”) were issued in a public offering to accredited institutional investors, and in June 2016, $20,000 of 7.00% fixed-to-floating rate subordinated notes (the “June 2016 Subordinated Notes”) were issued to certain accredited institutional investors in a private offering. The subordinated notes are unsecured and will rank at least equally with all of the Company’s other unsecured subordinated indebtedness and will be effectively subordinated to all of our secured debt to the extent of the value of the collateral securing such debt. The subordinated notes will be subordinated in right of payment to all of our existing and future senior indebtedness, and will rank structurally junior to all existing and future liabilities of our subsidiaries including, in the case of the Company’s bank subsidiary, its depositors, and any preferred equity holders of our subsidiaries. The holders of the subordinated notes may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership, insolvency, liquidation, or similar proceeding.

The issuance costs related to the March 2016 Subordinated Notes amounted to $1,382 and are being amortized as interest expense over the ten-year term of the March 2016 Subordinated Notes. The issuance costs related to the June 2016 Subordinated Notes were $404 and are being amortized as interest expense over the ten-year term of the June 2016 Subordinated Notes. For the three months ended March 31, 2019 and 2018, amortization of issuance costs has amounted to $45 and $45, respectively.

The following table summarizes the terms of each subordinated note offering:

	March 2016 Subordinated Notes	June 2016 Subordinated Notes
Principal amount issued	$40,000	$20,000
Maturity date	March 30, 2026	July 1, 2026
Initial fixed interest rate	6.875%	7.00%
Initial interest rate period	5 years	5 years
First interest rate change date	March 30, 2021	July 1, 2021
Interest payment frequency through year five*	Semiannually	Semiannually
Interest payment frequency after five years*	Quarterly	Quarterly
Interest repricing index and margin	3-month LIBOR plus 5.636%	3-month LIBOR plus 6.04%
Repricing frequency after five years	Quarterly	Quarterly

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All dollar values in this section are in thousands.)

The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. This discussion and analysis should be read in conjunction with the accompanying unaudited financial statements, the audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 19, 2019, which includes additional information about critical accounting policies and practices and risk factors. Historical results and trends that might appear in the consolidated financial statements should not be interpreted as being indicative of future operations.

Company Overview

We are a financial holding company headquartered in Franklin, Tennessee. Through our wholly-owned bank subsidiary, Franklin Synergy Bank, a Tennessee-chartered commercial bank and a member of the Federal Reserve System, we provide a full range of banking and related financial services with a focus on service to small businesses, corporate entities, local governments and individuals. We operate through 15 branches and a loan production office in the growing Williamson, Rutherford and Davidson Counties within the Nashville metropolitan area. As used in this report, unless the context otherwise indicates, any reference to “Franklin Financial,” “our Company,” “the Company,” “us,” “we” and “our” refers to Franklin Financial Network, Inc. together with its consolidated subsidiaries (including Franklin Synergy Bank), any reference to “FFN” refers to Franklin Financial Network, Inc. only and any reference to “Franklin Synergy” or the “Bank” refers to our banking subsidiary, Franklin Synergy Bank.

As of March 31, 2019, we had consolidated total assets of $4,238,436, total loans, including loans held for sale, of $2,801,250, total deposits of $3,315,843 and total equity of $383,514.

Our principal executive office is located at 722 Columbia Avenue, Franklin, Tennessee 37064-2828, and our telephone number is (615) 236-2265. Our website is www.franklinsynergybank.com. The information contained on or accessible from our website does not constitute a part of this report and is not incorporated by reference herein.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

The Company’s accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 of the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 19, 2019. The critical accounting policies require judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Management has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief summary of the more significant policies.

Allowance for Loan Losses (ALLL)

The ALLL is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes a loan balance has become uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individual ly classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDR’s) and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All loans classified by management as substandard or worse are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

TDR’s are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDR’s that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the ALLL.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Bank’s loss history and loss history from the Bank’s peer group over the past three years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

COMPARISON OF RESULTS OF OPERATIONS FOR

THE THREE MONTHS ENDED MARCH 31, 2019 and 2018

( Dollar Amounts in Thousands )

Overview

The Company reported net income and net income available to common shareholders of $2,901 and $10,052 for the three months ended March 31, 2019 and 2018, respectively. Net income available to common shareholders decreased by $7,151 when comparing 2019 with 2018, primarily due to $4,143 related to post employment and retirement expense, along with $3,486 related to a specific loan loss provision on a shared national credit (SNC).

Net Interest Income/Margin

Net interest income consists of interest income generated by earning-assets less interest expense paid on interest-bearing liabilities and is the most significant component of our revenues. Net interest income for the three months ended March 31, 2019 and 2018 totaled $27,420 and $25,116, respectively, an increase of $2,304 or 9.2%. For the three months ended March 31, 2019, interest income increased $9,476 or 24.9% due primarily to growth in the loan portfolio. For the three months ended March 31, 2019, interest expense increased $7,172 or 55.5% due primarily to increases in interest rates paid on deposits.

Interest-earning assets averaged $4,044,231 and $3,867,957 during the three months ended March 31, 2019 and 2018 , respectively, an increase of $176,274 , or 4.6% . This increase was primarily due to growth in average loans of $466,214, which was offset by decreases in securities and federal funds sold and other of $187,947 and $106,488, respectively, when comparing the three months ended March 31, 2019 wit h the same period in 2018 .

When comparing the three months ended March 31, 2019 and 2018, the yield on average interest earning assets, adjusted for tax equivalent yield, increased 76 basis points in 2019 to 4.82% compared to 4.06% for the same period during 2018. For the three months ended March 31, 2019, the tax equivalent yield on loans was 5.61%, and for the three months ended March 31, 2018, the tax equivalent yield on loans was 5.07%. The primary driver for the increase in yields on loans was the increase in market interest rates when compared to the same quarter in the previous year.

Interest-bearing liabilities averaged $3,490,227 during the three months ended March 31, 2019, compared to $3,371,827 for the same period in 2018, an increase of $118,400, or 3.5%. Total average interest-bearing deposits grew $71,408, or 2.4%, including an increase in average money market deposit accounts of $248,369, offset by decreases in average interest checking ($61,236), average savings deposits ($9,833) and average time deposits ($105,892) for the three months ended March 31, 2019, as compared to the same period during 2018. Average FHLB advances also increased by $68,044 when comparing the three months ended March 31, 2019 with the same period in 2018.

When comparing the three months ended March 31, 2019 and 2018, the cost of average interest-bearing liabilities increased 78 basis points to 2.34% from 1.56%. The increase was due to rate increases for interest-bearing deposits, FHLB advances and federal funds purchased.

The tables below summarize average balances, annualized yields and rates, cost of funds, and the analysis of changes in interest income and interest expense for the three months ende d March 31, 2019 and 2018 :

Average Balances—Yields & Rates ⁽⁷⁾

(Dollars are in thousands)

	Three Months Ended March 31,
	2019								2018
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans ⁽¹⁾⁽⁶⁾	$	2,764,675		$	38,238		5.61	%	$	2,299,219		$	28,732		5.07	%
Loans held for sale		9,438			115		4.94			8,680			73		3.41
Securities:
Taxable		919,549			6,394		2.82			1,059,989			6,111		2.34
Tax-exempt ⁽⁶⁾		181,699			1,990		4.44			229,206			2,592		4.59
Restricted equity securities		22,375			334		6.05			18,658			274		5.96
Certificates of deposit at other financial institutions		3,592			20		2.26			2,814			12		1.73
Federal funds sold and other ⁽²⁾		142,903			967		2.74			249,391			942		1.53
TOTAL INTEREST EARNING ASSETS	$	4,044,231		$	48,058		4.82	%	$	3,867,957		$	38,736		4.06	%
Allowance for loan and lease losses		(24,054	)							(21,683	)
All other assets		200,078								125,590
TOTAL ASSETS	$	4,220,255							$	3,971,864
LIABILITIES & EQUITY
Deposits:
Interest checking	$	857,096		$	4,420		2.09	%	$	918,332		$	3,166		1.40	%
Money market		992,842			5,979		2.44			744,473			2,600		1.42
Savings		40,609			28		0.28			50,442			38		0.31
Time deposits		1,165,666			6,563		2.28			1,271,558			4,839		1.54
Federal Home Loan Bank advances		364,711			1,918		2.13			296,667			1,110		1.52
Federal funds purchased and other ⁽³⁾		10,594			72		2.76			31,823			96		1.22
Subordinated notes and other borrowings		58,709			1,123		7.76			58,532			1,082		7.50
TOTAL INTEREST BEARING LIABILITIES	$	3,490,227		$	20,103		2.34	%	$	3,371,827		$	12,931		1.56	%
Demand deposits		291,176								286,918
Other liabilities		61,736								13,279
Total equity		377,116								299,840
TOTAL LIABILITIES AND EQUITY	$	4,220,255							$	3,971,864
NET INTEREST SPREAD ⁽⁴⁾							2.48	%							2.50	%
NET INTEREST INCOME				$	27,955							$	25,805
NET INTEREST MARGIN ⁽⁵⁾							2.80	%							2.71	%

⁽¹⁾	Loan balances include loans held in the Bank’s portfolio and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.

⁽²⁾	Includes federal funds sold and interest-bearing deposits at the Federal Reserve Bank, the Federal Home Loan Bank and other financial institutions.

⁽³⁾	Includes repurchase agreements.

⁽⁴⁾	Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

⁽⁵⁾	Represents net interest income (annualized) divided by total average earning assets.

⁽⁶⁾	Interest income and rates include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.

⁽⁷⁾	Average balances are average daily balances.

Analysis of Changes in Interest Income and Expenses

	Net change three months ended March 31, 2019 versus March 31, 2018
	Volume			Rate			Net Change
INTEREST INCOME
Loans	$	5,819		$	3,687		$	9,506
Loans held for sale		6			36			42
Securities
Taxable		(810	)		1,093			283
Tax-exempt		(538	)		(64	)		(602	)
Restricted equity securities		55			5			60
Certificates of deposit at other financial institutions		3			5			8
Federal funds sold and other		(402	)		427			25
TOTAL INTEREST INCOME	$	4,133		$	5,189		$	9,322
INTEREST EXPENSE
Deposits
Interest checking	$	(211	)	$	1,465		$	1,254
Money market accounts		870			2,509			3,379
Savings		(8	)		(2	)		(10	)
Time deposits		(402	)		2,126			1,724
Federal Home Loan Bank advances		255			553			808
Fed funds purchased and other borrowed funds		(64	)		40			(24	)
Subordinated Notes and other borrowings		3			38			41
TOTAL INTEREST EXPENSE	$	443		$	6,729		$	7,172
NET INTEREST INCOME	$	3,690		$	(1,540	)	$	2,150

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an ALLL that, in management’s evaluation, should be adequate to provide coverage for probable losses incurred in the loan portfolio. The allowance is increased by the provision for loan losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs.

The provision for loan losses was $5,055 and $573 for the three months ended March 31, 2019 and 2018, respectively. The higher provision for the three months ended March 31, 2019 compared to the same period in 2018 is based on the Company’s analysis of its ALLL which, based on the loan portfolio’s risk profile driven primarily by a specific reserve of $3,455 related to a SNC relationship, and comparatively higher loan growth, resulted in more provision being recorded. Nonperforming loans at March 31, 2019 totaled $11,904 compared to $5,696 at December 31, 2018, representing 0.42% and 0.22% of total loans for the respective periods.

Non-Interest Income

Non-interest income for the three months ended March 31, 2019 was $3,486 compared to $3,456 for the same period in 2018. The following is a summary of the components of non-interest income (in thousands):

	Three Months Ended March 31,					$ Increase			% Increase
	2019			2018		(Decrease)			(Decrease)
Service charges on deposit accounts	$	74		$	42	$	32			76.2	%
Other service charges and fees		757			751		6			0.8
Mortgage banking revenue		1,672			1,549		123			7.9
Wealth management		627			704		(77	)		(10.9	)
Gain on sale or call of securities		149			—		149		NM
Net (loss) gain on sale of loans		(217	)		9		(226	)		(2,511.1	)
Net gain on sale of foreclosed assets		4			3		1			33.3
Other		420			398		22			5.5
Total non-interest income	$	3,486		$	3,456	$	30			0.9	%

Mortgage banking revenue increased $123 for the three months ended March 31, 2019. The increase was due to the volume of mortgage loans originated, the sales related to those loans, and more favorable market rates in 2019, which resulted in favorable fair value adjustments on mortgage derivatives.

The decrease in (loss) gain on sale of loans is attributable to the sale of a Shared National Credit relationship during the three months ended March 31, 2019.

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2019 was $22,616 compared to $15,488 for the same period in 2018. The increases were the result of the following components listed in the table below (in thousands):

	Three Months Ended March 31,				$ Increase		% Increase
	2019		2018
Salaries and employee benefits	$	14,743	$	9,188	$	5,555		60.5	%
Occupancy and equipment		3,113		2,594		519		20.0
FDIC assessment expense		990		660		330		50.0
Marketing		319		280		39		13.9
Professional fees		923		869		54		6.2
Amortization of core deposit intangible		145		104		41		39.4
Other		2,383		1,793		590		32.9
Total non-interest expense	$	22,616	$	15,488	$	7,128		46.0	%

The increase in non-interest expense noted in the table above is related to the Company’s overall growth. The Company’s largest increases for the three months ended March 31, 2019, in comparison with the same periods of 2018, were in salaries and employee benefits, occupancy and equipment, professional fees, and other non-interest expense.

Salaries and employee benefits increased $5,555, or 60.5%, when comparing the three months ended March 31, 2019 with the same period in 2018. The increase is primarily due to $4,143 in post employment and retirement expenses. In addition, stock-based compensation expense increased $569 for the three months ended March 31, 2019 in comparison with the same period in 2018.

Occupancy and equipment expense increased $519, or 20.0%, when comparing the three months ended March 31, 2019 with the same period in 2018. The variance for the three months ended March 31, 2019 versus the three months ended March 31, 2018 is primarily attributable to increases in building rent expense of $158, software maintenance fees of $244, and other furniture, fixture & equipment expense $60.

The Company’s FDIC assessment expense increased $330, or 50.0%, when comparing the three months ended March 31, 2019 with the same period in 2018. The increase in comparing the three months ended March 31, 2019 to March 31, 2018 is due to asset growth.

Professional fees increased $54, or 6.2%, when comparing the three months ended March 31, 2019 with the same period in 2018. The increase when comparing the three months ended March 31, 2019 with the same period in 2018 is due to increases in other professional fees $9 and legal fees $86.

For the three months ended March 31, 2019, other non-interest expense increased $590, or 32.9%, when compared to the three months ended March 31, 2018. The increase in other non-interest expense for the three months ended March 31, 2019 versus March 31, 2018 is attributed to increases in several types of expenses, but the following expense types represent the largest variances: director fees of $44 and ATM Network Expense of $69.

Income Tax Expense

The Company recognized income tax expense for the three months ended March 31, 2019 of $334, compared to $2,459 for the three months ended March 31, 2018. The Company’s quarter-to-date income tax expense for the period ended March 31, 2019 reflects an effective income tax rate of 10.3%, which is a significant decrease compared to 19.7% for the same period in 2018 resulting from the Company’s participation in Tennessee’s Community Investment Tax Credit (CITC) program and due to the current quarter’s $4.1 million related to post employment and retirement expenses, along with $3.5 million related to a specific loan loss provision on a shared national credit (SNC).

COMPARISON OF BALANCE SHEETS AT March 31, 2019 and December 31, 2018

Overview

The Company’s total assets decreased by $11,003, or 0.3%, from December 31, 2018 to March 31, 2019. The decrease in total assets has primarily been the result of the continued balance sheet rotation and optimization strategies and the planned sales of investment securities during the three months ended March 31, 2019 offset by organic growth in the loan portfolio.

Loans

Lending-related income is the most important component of the Company’s net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and therefore generates the largest portion of revenues. For purposes of the discussion in this section, the term “loans” refers to loans, excluding loans held for sale, unless otherwise noted.

The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Total loans, net of deferred fees, at March 31, 2019 and December 31, 2018 were $2,807,377 and $2,665,399, respectively, an increase of $141,978, or 5.3%. As a percentage of total assets, total loans, net of deferred fees, at March 31, 2019 and December 31, 2018 were 66.2% and 62.7% of total assets, respectively. Growth in the loan portfolio is primarily due to increased market penetration and a healthy local economy. The Company has also attracted a number of experienced commercial and mortgage lenders to develop new relationships and broaden its presence in its primary markets in Middle Tennessee which include, Williamson County, Davidson County and Rutherford County.

The table below provides a summary of the loan portfolio composition for the periods noted.

	March 31, 2019						December 31, 2018
Types of Loans	Amount			% of Total Loans			Amount			% of Total Loans
Total loans, excluding purchased credit impaired (“PCI”) loans
Real estate:
Construction and land development	$	581,340			20.7	%	$	584,440			21.9	%
Commercial		893,491			31.8			802,260			30.1
Residential		694,190			24.7			682,806			25.6
Commercial and industrial		635,417			22.5			590,854			22.1
Consumer and other		4,447			0.2			5,568			0.2
Total loans—gross, excluding PCI loans		2,808,885			99.9			2,665,928			99.9
Total PCI loans		2,020			0.1			2,015			0.1
Total gross loans		2,810,905			100.0	%		2,667,943			100.0	%
Less: deferred loan fees, net		(3,528	)					(2,544	)
Allowance for loan losses		(27,857	)					(23,451	)
Total loans, net allowance for loan losses	$	2,779,520					$	2,641,948

The table below provides a summary of the Share National Credit portfolio for the periods noted.

Shared National Credit ("SNC"s) and Healthcare Portfolios	March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			March 31, 2018			QoQ Growth*			YoY Growth
Total SNC	$	229,608		$	249,033		$	162,588		$	155,798		$	117,721			(31.6	%)		95.0	%

% of Total loans held for investment		8.2	%		9.3	%		6.4	%		6.3	%		5.1	%

Healthcare	$	318,020		$	290,464		$	285,284		$	257,225		$	199,425			38.5	%		59.5	%
SNC		107,156			123,097			103,772			107,894			89,162			(52.5	%)		20.2	%
Non-SNC		210,864			167,367			181,512			149,331			110,263			105.4	%		91.2	%

*Annualized

The discussion in the following paragraphs includes the PCI loans in the breakdown of the various categories of loans.

Total gross loans increased 5.3% during the first three months ended March 31, 2019, due to organic growth as a result of continued market penetration and the strength of the local economies. During this period, the Company experienced growth in real estate loans of 4.8% with growth occurring in the residential real estate 1.7% and commercial real estate 11.4% segments. The Company also experienced an increase of 7.5% in the commercial and industrial segment during the three months ended March 31, 2019.

Real estate loans, including $74 of PCI loans, comprised 77.2% of the loan portfolio at March 31, 2019. The largest portion of the real estate segments as of March 31, 2019, was commercial real estate loans, which totaled 41.2% of real estate loans. Commercial real estate loans totaled $893,490 at March 31, 2019, and comprised 31.8% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and other properties.

Construction and land development loans totaled $581,340 at March 31, 2019, and comprised 26.8% of total real estate loans and 20.7% of the total loan portfolio. Loans in this classification provide financing for the construction and development of residential properties and commercial income properties, multi-family residential development, and land designated for future development.

The residential real estate classification primarily includes 1-4 family residential loans which are typically conventional first-lien home mortgages, not including loans held-for-sale in the secondary market, and it also includes home equity lines of credit and other junior lien mortgage loans. Residential real estate loans totaled $694,264 and comprised 32.0% of real estate loans and 24.7% of total loans at March 31, 2019.

Commercial and industrial loans totaled $637,363 at March 31, 2019 which includes $1,946 of PCI loans. Loans in this classification comprised 22.7% of total loans at March 31, 2019. The commercial and industrial classification consists of commercial loans to small-to-medium sized businesses, shared national credits, and commercial healthcare loans.

The banking agencies define a “Shared National Credit” (SNC) as any loan extended to a borrower which aggregates $100 million or more and is shared by three or more banks. The SNC portfolio totaled $229,608 at March 31, 2019, decreasing $19,425, or 31.6%, from $249,033 at December 31, 2018. All of the outstanding balance of SNCs was included in the commercial and industrial portfolio. SNC participations are originated in the normal course of business to meet the needs of our customers and are reviewed at least quarterly for credit quality.

The repayment of loans is a source of additional liquidity for the Company. The following table sets forth the loans maturing within specific intervals at March 31, 2019, excluding unearned net fees and costs.

Loan Maturity Schedule

	March 31, 2019
	One year or less		Over one year to five years		Over five years		Total
Real estate:
Construction and land development	$	300,870	$	146,717	$	133,753	$	581,340
Commercial		52,879		258,502		582,109		893,490
Residential		43,045		164,953		486,266		694,264
Commercial and industrial		75,135		395,320		166,908		637,363
Consumer and other		1,712		2,407		329		4,448
Total	$	473,641	$	967,899	$	1,369,365	$	2,810,905
Fixed interest rate	$	142,237	$	377,726	$	420,834	$	940,797
Variable interest rate		331,404		590,173		948,531		1,870,108
Total	$	473,641	$	967,899	$	1,369,365	$	2,810,905

The information presented in the above table is based upon the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity structure of the loan portfolio.

Allowance for Loan Losses (ALLL)

The Company maintains an ALLL that management believes is adequate to absorb the probable incurred losses inherent in the Company’s loan portfolio. The allowance is increased by provisions for loan losses charged to earnings and is decreased by loan charge-offs net of recoveries of prior period loan charge-offs. The level of the allowance is determined on a quarterly basis, although management is engaged in monitoring the adequacy of the allowance on a more frequent basis. In estimating the allowance balance, the following factors are considered:

•

past loan experience;

•

the nature and volume of the portfolio;

•

risks known about specific borrowers;

•

underlying estimated values of collateral securing loans;

•

current and anticipated economic conditions; and

•

other factors which may affect the allowance for probable incurred losses.

The ALLL consists of two primary components: (1) a specific component which relates to loans that are individually classified as impaired and (2) a general component which covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Company’s loss history and loss history from peer group data over the past three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

The following loan portfolio segments have been identified: (1) Construction and land development loans, (2) Commercial real estate loans, (3) Residential real estate loans, (4) Commercial and industrial loans and (5) Consumer and other loans. Management evaluates the risks associated with these segments based upon specific characteristics associated with the loan segments. These risk characteristics include, but are not limited to, the value of the underlying collateral, adverse economic conditions and the borrower’s cash flow. While the total allowance consists of a specific portion and a general portion, both portions of the allowance are available to provide for probable incurred loan losses in the entire portfolio.

In the table below, the components, as discussed above, of the ALLL are shown at March 31, 2019 and December 31, 2018.

	March 31, 2019							December 31, 2018							Increase (Decrease)
	Loan Balance		ALLL Balance		%			Loan Balance		ALLL Balance		%			Loan Balance			ALLL Balance
Non impaired loans	$	2,714,663	$	24,233		0.89	%	$	2,568,930	$	23,249		0.91	%	$	145,733		$	984		-2 bps
Non-PCI acquired loans (Note 1)		82,701		169		0.20			91,344		185		0.20			(8,643	)		(16	)	0 bps
Impaired loans		11,521		3,455		29.99			5,654		17		0.30			5,867			3,438		2969 bps
Non-PCI loans		2,808,885		27,857		0.99			2,665,928		23,451		0.88			142,957			4,406		11 bps
PCI loans		2,020		—		—			2,015		—		—			5			—			—
Total loans	$	2,810,905	$	27,857		0.99	%	$	2,667,943	$	23,451		0.88	%	$	142,962		$	4,406		11 bps

⁽¹⁾ Loans acquired are performing loans recorded at estimated fair value at the acquisition date. Based on the analysis performed by management as of March 31, 2019, $169 in ALLL was recorded at March 31, 2019 related to the loans acquired and not otherwise considered PCI.

At March 31, 2019, the ALLL was $27,857, compared to $23,451 at December 31, 2018. The ALLL as a percentage of total loans was 0.99% at March 31, 2019 and 0.88% at December 31, 2018. The Company’s loan growth and management’s evaluation of the risk profile, combined with recent developments in one SNC relationship during the first quarter of 2019 are the primary reasons for the increase in the allowance amount.

The table below sets forth the activity in the ALLL for the periods presented.

	Three Months Ended March 31, 2019			Three Months Ended March 31, 2018
Beginning balance	$	23,451		$	21,247
Loans charged-off:
Construction & land development		—			39
Commercial real estate		—			—
Residential real estate		15			7
Commercial & industrial		568			49
Consumer & other		70			11
Total loans charged-off		653			106
Recoveries on loans previously charged-off:
Construction & land development		—			—
Commercial real estate		—			—
Residential real estate		2			19
Commercial & industrial		—			—
Consumer & other		2			5
Total loan recoveries		4			24
Net charge-offs		(649	)		(82	)
Provision for loan losses charged to expense		5,055			573
Total allowance at end of period	$	27,857		$	21,738
Total loans, gross, at end of period ⁽¹⁾	$	2,810,905		$	2,312,243
Average gross loans ⁽¹⁾	$	2,764,675		$	2,301,054
Allowance to total loans		0.99	%		0.94	%
Net charge-offs (recoveries) to average loans, annualized		0.10	%		0.01	%

⁽¹⁾ Loan balances exclude loans held for sale

While no portion of the allowance is in any way restricted to any individual loan or group of loans, and the entire allowance is available to absorb losses from any and all loans, the following table summarizes the allocation of ALLL by loan category and loans in each category as a percentage of total loans, for the periods presented.

	March 31, 2019					December 31, 2018
	Amount		% of Loan Segment to Total Loans			Amount		% of Loan Segment to Total Loans
Real estate loans:
Construction and land development	$	4,680		20.7	%	$	4,743		21.9	%
Commercial		7,118		31.8			6,725		30.1
Residential		4,726		24.7			4,743		25.6
Total real estate		16,524		77.2			16,211		77.6
Commercial and industrial		11,283		22.6			7,166		22.2
Consumer and other		50		0.2			74		0.2
	$	27,857		100.0	%	$	23,451		100.0	%

Nonperforming Assets

Non-performing loans consist of non-accrual loans and loans that are past due 90 days or more and still accruing interest. Non-performing assets consist of non-performing loans plus OREO (i.e., real estate acquired through foreclosure or deed in lieu of foreclosure). Loans are placed on non-accrual status when they are past due 90 days and / or management believes the borrower’s financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When a loan is placed on non-accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. The interest on these loans is accounted for on the cash-basis, or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The primary component of non-performing loans is non-accrual loans, which as of March 31, 2019 totaled $11,724. The other component of non-performing loans are loans past due greater than 90 days and still accruing interest which totaled $180 at March 31, 2019. Loans past due greater than 90 days are placed on non-accrual status, unless they are both well-secured and in the process of collection.

The table below summarizes non-performing loans and assets for the periods presented.

	March 31, 2019			December 31, 2018
Non-accrual loans	$	11,724		$	5,488
Past due loans 90 days or more and still accruing interest		180			208
Total non-performing loans		11,904			5,696
Foreclosed real estate and repossessed assets		-			-
Total non-performing assets		11,904			5,696
Total non-performing loans as a percentage of total loans		0.42	%		0.21	%
Total non-performing assets as a percentage of total assets		0.28	%		0.13	%
Allowance for loan losses as a percentage of non-performing loans		234	%		412	%

As of March 31, 2019, there were 13 loans on non-accrual status. The amount and number are further delineated by collateral segment and number of loans in the table below.

	Total Amount		Percentage of Total Non-Accrual Loans			Number of Non-Accrual Loans
Construction & land development	$	583		5.0	%		1
Commercial real estate		153		1.3			1
Residential real estate		1,811		15.4			6
Commercial & industrial		9,177		78.3			5
Consumer		—		—			—
Total non-accrual loans	$	11,724		100.0	%		13

Investment Securities and Other Earning Assets

The investment securities portfolio is intended to provide the Company with adequate liquidity and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of both securities classified as available-for-sale and securities classified as held-to-maturity. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in the Company’s best interest. Securities available-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities, totaled $799,301 at March 31, 2019, compared to $1,030,668 at December 31, 2018, a decrease of $231,367, or 22.4%. The decrease in available-for-sale securities was primarily attributed to security sales during the first three months of 2019.

Held-to-maturity securities are carried at amortized cost. This portfolio, consisting of U.S. government sponsored enterprises, mortgage-backed securities and municipal securities, totaled $118,831 at March 31, 2019, compared to $121,617 at December 31, 2018, a decrease of $2,786, or 2.3%. The decrease is attributable to securities that matured or had principal pay downs during the first three months of 2019.

The combined securities portfolios represented 21.7% and 27.1% of total assets at March 31, 2019 and December 31, 2018 , respectively. At March 31, 2019 , the Company had no securities that were classifi ed as having other than temporary impairment.

The Company also had other investments of $22,803 and $21,831 at March 31, 2019 and December 31, 2018, respectively, primarily consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (required as members of the Federal Reserve Bank System (FRB) and the Federal Home Loan Bank System (FHLB)). The FHLB and FRB investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost.

Bank Premises and Equipment

Bank premises and equipment totaled $12,682 at March 31, 2019 compared to $12,371 at December 31, 2018, an increase of $311, or 2.5%. The increase is primarily attributed to an increase of $389 in leasehold improvements net of depreciation related to several of the Company’s locations.

Deposits

At March 31, 2019, total deposits were $3,315,844, an increase of $115,963, or 3.4%, compared to $3,431,807 at December 31, 2018. Included in the Company’s funding strategy are brokered deposits, public funds deposits and reciprocal deposits. Total brokered deposits decreased $79,112, or 9.9%, to $718,683 at March 31, 2019, when compared with $797,795 at December 31, 2018, which reflects the Company’s strategy to reduce its dependence on non-core funding. Public funds deposits decreased $153,904, or 19.7%, to $628,985 at March 31, 2019 when compared with $782,889 at December 31, 2018 due to the Company’s strategy to redirect some of the Company’s local government customers into the reciprocal account relationships, thereby decreasing the Company’s requirements to collateralize those public funds deposits. As a result, reciprocal deposits increased $122,509, or 39.2%, to $435,191 at March 31, 2019.

Time deposits, excluding brokered deposits and public funds, as of March 31, 2019, amounted to $412,650, compared to $532,445 as of December 31, 2018, a decrease of $119,795, or 22.5%.

The following table shows time deposits in denominations of $100 or more based on time remaining until maturity:

	March 31, 2019
Three months or less	$	178,399
Three through six months		74,839
Six through twelve months		58,875
Over twelve months		150,667
Total	$	462,780

Federal Funds Purchased and Repurchase Agreements

The Company had no federal funds purchased from correspondent banks or repurchase agreements as of March 31, 2019 and December 31, 2018.

Federal Home Loan Bank Advances

The Company has established a line of credit with the FHLB of Cincinnati which is secured by a blanket pledge of 1-4 family residential mortgages and home equity lines of credit. At March 31, 2019 and at December 31, 2018, advances totaled $416,500 and $368,500, respectively, and the scheduled maturities and interest rates of these advances were as follows:

Scheduled Maturities	Amount		Weighted Average Rates
2019	$	261,500		2.30	%
2020		155,000		2.41	%
Total	$	416,500		2.34	%

Subordinated Notes

At March 31, 2019, the Company’s subordinated notes, net of issuance costs, totaled $58,738, compared with $58,693 at December 31, 2018. For more information related to the subordinated notes and the related issuance costs, please see Note 11 of the consolidated financial statements.

Liquidity

Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis.

Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost-effectively and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows. In this process, management focuses on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet the Company’s needs. Our source of funds to pay interest on our March 2016 Subordinated Notes and June 2016 Subordinated Notes is generally in the form of a dividend from the Bank to the Company, or those payments may be serviced from cash balances held by the Company. The Bank’s ability to pay a dividend may be restricted due to regulatory requirements as well as the Bank’s future earnings and capital needs.

Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, payments of principal and interest as well as sales of investments classified as available-for-sale, and sales of brokered deposits. As of March 31, 2019, $799,301 of the investment securities portfolio was classified as available-for-sale and is reported at fair value on the consolidated balance sheet. Another $118,831 of the portfolio was classified as held-to-maturity and is reported at amortized cost. Approximately $711,826 of the total $918,132 investment securities portfolio on hand at March 31, 2019, was pledged to secure public deposits and repurchase agreements. Other funding sources available include repurchase agreements, federal funds purchased, and borrowings from the Federal Home Loan Bank.

Equity

As of March 31, 2019, the Company’s equity was $383,514, as compared with $372,833 as of December 31, 2018. The increase in equity was due to the Company’s earnings of $2,901 in the first quarter of 2019, the increase in common stock of $1,853, offset by the $8,754 decrease in the valuation of available-for-sale securities.

Effects of Inflation and Changing Prices

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions’ increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Commercial and other loan originations and refinancings tend to slow as interest rates increase, and can reduce the Company’s earnings from such activities.

Off Balance Sheet Arrangements

The Company generally does not have any off-balance sheet arrangements other than approved and unfunded loans and lines and letters of credit to customers in the ordinary course of business. At March 31, 2019, the Company had unfunded loan commitments outstanding of $49,565, unused lines of credit of $751,601, and outstanding standby letters of credit of $40,461.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial data included in our selected historical consolidated financial information are not measures of financial performance recognized by GAAP. Our management uses these non-GAAP financial measures in its analysis of our performance:

•

“Common shareholders’ equity” is defined as total shareholders’ equity at end of period less the liquidation preference value of the preferred stock;

•

“Tangible common shareholders’ equity” is common shareholders’ equity less goodwill and other intangible assets;

•

“Tangible book value per share” is defined as tangible common shareholders’ equity divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets;

•

“Return on Average Tangible Common Equity” is defined as net income available to common shareholders divided by average tangible common shareholders’ equity;

•

“Efficiency ratio” is defined as noninterest expenses divided by our operating revenue, which is equal to net interest income plus noninterest income.

We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use.

The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:

	As of or for the Three Months Ended
(Amounts in thousands, except share/per share data and percentages)	March 31, 2019			December 31, 2018			Sept 30, 2018			June 30, 2018			Mar 31, 2018
Total shareholders’ equity	$	383,421		$	372,740		$	356,074		$	348,059		$	304,762
Less: Preferred stock		—			—			—			—			—
Total common shareholders’ equity		383,421			372,740			356,074			348,059			304,762
Common shares outstanding		14,574,339			14,538,085			14,525,351			14,480,240			13,258,142
Book value per share	$	26.31		$	25.64		$	24.51		$	24.04		$	22.99
Total common shareholders’ equity		383,421			372,740			356,074			348,059			304,762
Less: Goodwill and other intangible assets		19,020			19,128			19,327			19,499			10,074
Tangible common shareholders’ equity	$	364,401		$	353,612		$	336,747		$	328,560		$	294,688
Common shares outstanding		14,574,339			14,538,085			14,525,351			14,480,240			13,258,142
Tangible book value per share	$	25.00		$	24.32		$	23.18		$	22.69		$	22.23
Average total common equity		377,116			299,840			351,293			340,175			299,840
Less: Average Preferred stock		—			—			—			—			—
Less: Average Goodwill and other intangible assets		19,109			19,268			19,433			19,860			10,136
Average tangible common shareholders’ equity	$	358,007		$	280,572		$	331,860		$	320,315		$	289,704
Net income available to common shareholders		2,901			3,743			10,549			10,161			10,052
Average tangible common equity		358,007			325,012			331,860			320,315			289,704
Return on average tangible common equity		3.3	%		4.6	%		12.6	%		12.7	%		14.1	%
Efficiency Ratio:
Net interest income	$	27,420		$	26,920		$	26,562		$	26,905		$	25,116
Noninterest income		3,486			(383	)		3,442			4,147			3,456
Operating revenue		30,906			26,537			30,004			31,052			28,572
Expense
Total noninterest expense		22,616			21,689			18,251			18,050			15,488
Efficiency ratio		73.2	%		81.7	%		60.8	%		58.1	%		54.2	%

FRANKLIN FINANCIAL NETWORK, INC.

SUMMARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

(Amounts in thousands, except per share data and percentages)

	As of and for the three months ended
	Mar 31, 2019		Dec 31, 2018			Sep 30, 2018		Jun 30, 2018		Mar 31, 2018
Income Statement Data ($):
Interest income		47,523		46,046			43,717		42,136		38,047
Interest expense		20,103		19,125			17,155		15,231		12,931
Net interest income		27,420		26,921			26,562		26,905		25,116
Provision for loan losses		5,055		975			136		570		573
Noninterest income (expense)		3,486		(384	)		3,442		4,147		3,456
Noninterest expense		22,616		21,689			18,251		18,050		15,488
Net income before taxes		3,235		3,873			11,617		12,432		12,511
Income tax expense		334		122			1,068		2,263		2,459
Net income		2,901		3,743			10,549		10,161		10,052
Earnings before interest and taxes		23,338		23,048			28,722		27,663		25,442
Net income available to common shareholders		2,901		3,743			10,549		10,161		10,052
Weighted average diluted common shares		14,804,830		14,821,540			14,903,751		14,814,059		13,672,384
Earnings per share, basic		0.20		0.26			0.73		0.71		0.76
Earnings per share, diluted		0.19		0.25			0.70		0.68		0.73
Dividend per share		0.04		—			—		—		—
Profitability (%)
Return on average assets		0.28		0.35			1.01		0.98		1.03
Return on average equity		3.1		4.1			11.9		12.0		13.6
Return on average tangible common equity ⁽³⁾		3.3		4.6			12.6		12.7		14.1
Efficiency ratio ⁽³⁾		73.2		81.7			60.8		58.1		54.2
Net interest margin ⁽¹⁾		2.80		2.69			2.70		2.74		2.71
Balance Sheet Data ($):
Loans (including HFS)		2,829,107		2,676,502			2,564,684		2,488,862		2,322,889
Loan loss reserve		27,857		23,451			22,479		22,341		21,738
Cash		300,113		280,212			144,660		176,870		246,164
Securities		918,132		1,152,285			1,319,774		1,357,918		1,399,801
Goodwill		18,176		18,176			18,176		18,176		9,124
Intangible assets (Sum of core deposit intangible and SBA servicing rights)		844		952			1,151		1,323		950
Assets		4,238,436		4,249,439			4,167,813		4,165,238		4,083,663
Deposits		3,315,843		3,431,807			3,371,550		3,398,025		3,355,153
Liabilities		3,854,922		3,876,606			3,811,636		3,817,076		3,778,798
Total shareholders' equity		383,421		372,740			356,074		348,059		304,865
Total equity		383,514		372,833			356,177		348,162		304,762
Tangible common equity ⁽³⁾		364,401		353,612			336,747		328,560		294,688
Asset Quality (%)
Nonperforming loans/ total loans ⁽²⁾		0.42		0.21			0.16		0.14		0.15
Nonperforming assets / (total loans ⁽²⁾ + foreclosed assets)		0.42		0.21			0.23		0.21		0.22
Loan loss reserve / total loans ⁽²⁾		0.99		0.88			0.88		0.90		0.94
Net charge-offs (recoveries) / average loans		0.10		0.00			0.00		0.00		0.01
Capital (%)
Tangible common equity to tangible assets ⁽³⁾		8.6		8.4			8.1		7.9		7.2
Leverage ratio		8.8		8.8			8.7		8.3		7.8
Common Equity Tier 1 ratio		11.3		12.2			12.2		12.1		11.5
Tier 1 risk-based capital ratio		11.3		12.2			12.2		12.1		11.5
Total risk-based capital ratio		14.0		14.9			15.0		15.0		14.4

⁽¹⁾	Net interest margins shown in the table above include tax-equivalent adjustments to adjust interest income on tax-exempt loans and tax-exempt investment securities to a fully taxable basis.

⁽²⁾	Total loans in this ratio exclude loans held for sale.

⁽³⁾	See Non-GAAP table in the preceding pages.

Emerging Growth Company Status

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under our Registration Statement on Form S-4, which was declared effective by the SEC on May 14, 2014; (2) the last day of the fiscal year in which we have $1.07 billion or more in annual revenues; (3) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); or (4) the date on which we have, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.

Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, it adopts the new or revised standard at the time public companies adopt the new or revised standard. This election is irrevocable.

ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK.

The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.

Management seeks to maintain profitability in both immediate and long-term earnings through funds management/interest rate risk management. Interest rate risk (sensitivity) management deals with the potential impact on earnings associated with changing interest rates using various rate change (shock) scenarios. The Company’s rate sensitivity position has an important impact on earnings. Senior management monitors the Company’s rate sensitivity position throughout each month, and the Asset Liability Committee (“ALCO”) of the Bank meets on a quarterly basis to analyze the rate sensitivity position and other aspects of asset/liability management. These meetings cover the spread between the cost of funds (primarily time deposits) and interest yields generated primarily through loans and investments, rate shock analyses, liquidity and dependency positions, and other areas necessary for proper balance sheet management.

Management believes interest rate risk is best measured by earnings simulation modeling. The simulation is run using the prime rate as the base with the assumption of rates increasing 100, 200, 300 and 400 basis points or decreasing 100 and 200 basis points. All rates are increased or decreased parallel to the change in prime rate. As a result of the simulation, over a 12-month time period ended March 31, 2019, net interest income was estimated to decrease 1.40% and 3.63% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to increase 0.84% and 2.58% in a 100 basis points and 200 basis points declining rate assumption, respectively. These results are in line with the Company’s guidelines for rate sensitivity.

The following chart reflects the Company’s sensitivity to changes in interest rates as indicated as of March 31, 2019.

Projected Interest Rate Change	Net Interest Income $		Net Interest Income $ Change from Base			% Change from Base
-200		110,455		2,783			2.58	%
-100		108,577		905			0.84	%
Base		107,672		—			0.00	%
+100		106,162		(1,510	)		(1.40	%)
+200		103,761		(3,911	)		(3.63	%)
+300		101,128		(6,544	)		(6.08	%)
+400		98,589		(9,083	)		(8.44	%)

The preceding sensitivity analysis is a modeling analysis, which changes periodically and consists of hypothetical estimates based upon numerous assumptions including interest rate levels, changes in the shape of the yield curve, prepayments on loans and securities, rates on loans and deposits, reinvestments of pay downs and maturities of loans, investments and deposits, changes in spreads between key market rates, and other assumptions. In addition, there is no input for growth or a change in asset mix. While assumptions are developed based on the current economic and market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. As market conditions vary from those assumed in the sensitivity analysis, actual results will differ. Also, these results do not include any management action that might be taken in responding to or anticipating changes in interest rates. The simulation results are one indicator of interest rate risk, and actual net interest income is largely impacted by the allocation of assets, liabilities, and product mix.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2019, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective.

(b) Changes in Internal Controls. There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, the Company believes would have a material adverse impact on the Company’s financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K filed with the SEC on March 19, 2019.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

IT EM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

Nolensville Lease

On May 6, 2019, the Bank and Nolensville Real Estate Partners, LLC entered into a Triple Net Office Lease Agreement (the “Lease”) related to the relocation of the Bank’s Nolensville, Tennessee branch, which is currently located at 7177 Nolensville Road, Suite A3, Nolensville, Tennessee 37135, to the premises subject to the Lease, which is located at 7216 Nolensville Road, Suite 100, Nolensville, Tennessee 37135. Nolensville Real Estate Partners, LLC is an affiliate of Henry W. Brockman, Jr. and Dr. David H. Kemp, each of whom are directors of the Company and the Bank. The Lease has a term of 15 years, which the Bank has the option to renew for two successive five year periods, and provides for monthly rent payments of $9,453 per month for the first year of the term of the Lease, subject to annual adjustments thereafter.

Executive Officer Resignation

On May 7, 2019, Sally E. Bowers entered into a Severance Agreement and General Release with the Bank, pursuant to which Ms. Bowers resigned from her position as Executive Vice President, Chief Mortgage Officer of the Bank, effective May 10, 2019. The Severance Agreement provides that Ms. Bowers will receive, in exchange for her release of all potential claims against the Company, and in accordance with the terms of her Confidentiality, Non-Competition, and Non-Solicitation Agreement dated as of January 29, 2014, a payment of (i) $132,934, which is equal to 12 months of Ms. Bowers’ current base pay, and (ii) $6,866.21, which is equal to one times the average cash incentive bonus pay earned by Ms. Bowers based on the last three years, in each case payable in bi-monthly installments. In addition, all of Ms. Bowers' outstanding, unvested equity awards will become fully vested on May 10, 2019.

ITEM 6. E XHIBITS

Exhibit No.	Description

10.1	Executive Transition Agreement dated March 8, 2019, between Franklin Financial Network, Inc., Franklin Synergy Bank, and Richard E. Herrington (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-k filed with the Securities and Exchange Commission on March 8, 2019).

10.2*	Triple Net Office Lease Agreement, by and between Nolensville Real Estate Partners, LLC and Franklin Synergy Bank, on May 6, 2019.

10.3*	Severance Agreement and General Release, by and between Franklin Synergy Bank and Sally Bowers, dated May 7, 2019.

10.4*	Commencement Agreement, by and between South Royal Oaks Partners, LLC and Franklin Synergy Bank, dated December 8, 2018 .

10.5*	Commencement Agreement, by and between SS McEwen, LLC and Franklin Synergy Bank, dated January 1, 2019 .

10.6*	Commencement Agreement, by and between 204 9 ^th Avenue Partners, LLC and Franklin Synergy Bank, dated February 14, 2019 .

31.1*	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).

31.2*	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).

32**	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).

101*	Interactive Data Files.

*	Filed herewith

**	Furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Franklin Financial Network, INC.

May 9, 2019	By:	/s/ Christopher J. Black
		Christopher J. Black Executive Vice President and Chief Financial Officer
		On behalf of the registrant and as Chief Financial Officer (Principal Financial Officer)

Exhibit 10.2

TRIPLE NET OFFICE LEASE AGREEMENT

THIS TRIPLE NET OFFICE LEASE AGREEMENT (this “Lease”) is made and entered into on this 6th day of May, 2019, by and between NOLENSVILLE REAL ESTATE PARTNERS, LLC , a Tennessee limited liability company, (“Landlord”), and FRANKLIN SYNERGY BANK , a Tennessee banking corporation (“Tenant”).

1. Leased Premises .

a. Subject to and upon the terms hereinafter set forth, and in consideration of the sum of Ten Dollars ($10.00) and the mutual covenants set forth herein, the receipt and sufficiency of which are hereby acknowledged, Landlord does hereby lease and demise to Tenant, and Tenant does hereby lease and take from Landlord, that certain improved real property municipally known as Suite 100, 7216 Nolensville Road located in Nolensville, Williamson County, Tennessee, consisting of 2,642 rentable square feet for a banking facility and 1,250 rentable square feet for a remote drive thru and more particularly described in Exhibit A attached hereto (the “Premises”).

b. Tenant’s taking possession of the Premises or any portion thereof shall be conclusive evidence against Tenant that such portion of the Premises was then in good order and satisfactory condition, subject to any "punch list" items identified in writing from Tenant to Landlord within thirty (30) days following completion of Landlord's Work, and further subject to any latent defects in Landlord's Work of which Tenant notifies Landlord in writing within one (1) year from the completion of Landlord's Work. Except to the extent expressly set forth in this Lease, Tenant acknowledges that no promise by or on behalf of Landlord, any of Landlord’s beneficiaries, or any of their respective agents, partners or employees to alter, remodel, improve, repair, decorate or clean the Premises has been made to or relied upon by Tenant, and that no representation respecting the condition of the Premises by or on behalf of Landlord, any of Landlord’s beneficiaries, or any of their respective agents, partners or employees has been made to or relied upon by Tenant.

2. Term . Subject to and upon the terms and conditions set forth herein, or in any exhibit hereto, the term (together with any extensions or renewals thereof, the “Term”) of this Lease shall commence on the Commencement Date (defined below) and shall expire one hundred eighty months (180) after the Commencement Date. “Commencement Date” shall be 30 days after Landlord completes Landlord's Work and delivers possession of the Premises to Tenant by Landlord giving Tenant written notice. For purposes of clarification, immaterial “punch list” items identified by Tenant pursuant to Section 1(b) shall not affect the Commencement Date, unless they materially and adversely affect Tenant's ability to (i) operate its business in the Premises or (ii) complete Tenant's build out of the Premises. The Commencement Date shall be set forth in a Commencement

Agreement, identical in the form to that attached hereto as Exhibit B and executed by Landlord and Tenant.

3. Use . The Premises are to be used and occupied solely for the purpose of providing financial and banking services and for any other lawful use, but for no unlawful purpose. Tenant shall not use or allow the Premises to be used for any improper, immoral, disreputable or objectionable purpose, and Tenant shall not cause, maintain or permit any nuisance or waste in, on or about the Premises. Without limitation of the foregoing, in no event shall Tenant use or permit the use of all or any portion of the Premises (i) as and/or for sleeping quarters and/or lodging or (ii) for any unlawful purpose of any kind whatsoever and howsoever arising.

4. Rent .

a. Commencing on the Commencement Date and continuing thereafter throughout the full Term of this Lease, Tenant hereby agrees to pay the annual Base Rental (defined and set forth below) and Additional Rental (defined below). The Base Rental shall be due and payable in advance in twelve equal monthly installments on the first day of each calendar month at Landlord's address as provided herein (or such other address as may be designated by Landlord from time to time) with a 7 day grace period. If the Commencement Date is other than the first day of a calendar month or if this Lease expires on other than the last day of a calendar month, then the installments of Base Rental for such month or months shall be prorated. First month’s rent shall be due upon lease execution.

“Base Rental” shall mean the amount of rent due to Landlord per square foot for the first year of the Term as set forth in the Base Rental Agreement by and between Landlord and Tenant, in the form attached hereto as Exhibit B , to be executed and delivered to Landlord before the Commencement Date; provided, however, that Base Rental for the first year of Term for the Premises shall be as follows:

Year	Per Square Foot Banking Facility	Per Square Foot Remote Drive Thru	Total Per Annum	Total Per Month
1	$33	$21	$113,436	$9,453.00

Following the first year of the Term, Base Rental shall increase on each anniversary of the Commencement Date as set forth herein. Effective on each Adjustment Date (defined below), Base Rental shall be increased (relative to the previous year’s Base Rental) by the percentage increase, if any, in the CPI (defined below); provided, however, that each annual increase in Base Rental shall not be less than 1.5% of the previous year’s annual Base Rental and not more than 3.5% of the previous year’s annual Base Rental. “Adjustment Date” shall mean, as the case may require, each anniversary of the Commencement Date; provided, however, if the Commencement Date is other than the first day of the month, then “Adjustment Date” shall mean, as the case may require, the first day of the first month occurring after each anniversary of the Commencement Date. As used herein, “CPI” shall mean the Consumer Price Index for All Urban Consumers – South Urban Area, All Items, U.S.A. Area, 1982-1984 = 100, as published by the Bureau of Labor Statistics, United States Department of Labor (U.S. City Average). If such index is discontinued, CPI shall then mean the most nearly comparable index published by the Bureau of Labor Statistics or other official agency of the United States Government as determined by Landlord.

b. All sums other than Base Rental due Landlord under this Lease (including, without limitation, amounts reimbursed to Landlord or for which Tenant must indemnify Landlord, late fees, and attorney fees and costs) shall be additional rental (“Additional Rental”). Base Rental and Additional Rental collectively are referred to as “Rental” or “Rent”.

5. Renewal Options .

a. Tenant shall have the right and option to renew the Lease (“Renewal Option”) for two (2) successive renewal periods of five (5) years each (each, an “Option Term”); provided, however, the Renewal Option is contingent upon the following: (i) there is not an Event of Default beyond all applicable cure period(s) at the time Tenant gives Landlord notice of Tenant’s intention to exercise the Renewal Option or at the expiration of the current Term; (ii) no event has occurred that upon notice or the passage of time would constitute an Event of Default, unless Landlord has given notice of default and Tenant is diligently attempting to cure such event; and (iii) Tenant is occupying the Premises. Following expiration of the final Option Term allowable hereunder, Tenant shall have no further right to renew the Lease pursuant to this Section 5.

b. Tenant shall exercise the Renewal Option by giving Landlord notice at least one hundred eighty (180) days prior to the expiration of the current Term. If Tenant fails to give notice to Landlord prior to the 180-day period, then Tenant shall forfeit the Renewal Option. If Tenant exercises the Renewal Option, then during the Option Term, Landlord and Tenant’s respective rights, duties and obligations shall be governed by the terms and conditions of the Lease, except as provided otherwise in this Section. Time is of the essence in exercising the Renewal Option.

c. The Base Rental for an Option Term shall be the Fair Market Rental Rate. “Fair Market Rental Rate” shall mean the market rental rate for the time period such determination is being made for bank and financial space in same class office buildings in the area of

Nolensville , Tennessee (the “Area”) of comparable condition for space of equivalent quality, size, utility, and location. Such determination shall take into account all relevant factors, including, without limitation, the following matters: the credit standing of Tenant; the length of the term; the fact that Landlord will experience no vacancy period and that Tenant will not suffer the costs and business interruption associated with moving its offices and negotiating a new lease; construction allowances and other tenant concessions that would be available to tenants comparable to Tenant in the Area (such as moving expense allowance, free rent periods, and lease assumptions and take over provisions, if any, but specifically excluding the value of improvements installed in the Premises at Tenant’s cost), and whether adjustments are then being made in determining the rental rates for renewals in the Area because of concessions being offered by Landlord to Tenant (or the lack thereof for the Option Term in question). For purposes of such calculation, it will only be assumed that Landlord is paying a representative of Tenant a brokerage commission in connection with the Option Term in question if Landlord is in fact paying a brokerage commission to a representative of Tenant in connection with the applicable Option Term.

6. Utilities and Service . Tenant shall be responsible for its own interior maintenance, janitorial and utilities, which are separately metered. Tenant shall pay its pro rata share of operating expenses including but not limited to common area maintenance, real estate taxes and common area liability insurance. Tenant’s pro rata share of Operating Costs that are controllable by Landlord, excluding expenditures for insurance, taxes, governmental or regulatory fees or expenses, security costs, snow and ice removal, and utilities (“Controllable Operating Costs”) shall be no more than $3 per square foot in lease year one. Lease year 2 and thereafter shall not exceed 105% of Tenant’s pro rata share of Controllable Operating Costs for the immediately preceding year. At all times during the term of this Lease, Tenant shall pay its full pro rata share of the uncontrollable Operating Costs attributable to taxes, insurance, governmental or regulatory fees or expenses, security costs, snow and ice removal, and utilities. Tenant shall begin paying Operating Expenses upon the Rent Commencement Date. Tenant’s pro rata share shall be 14.8% as calculated by dividing the total rentable square footage of the building (17,810 square feet) by the square footage of the Tenant’s space (2,642 square feet). Tenant shall have the option to request backup for all of the expenses in order to verify the Tenant’s portion, and Landlord shall provide the information within 10 business days after the request has been received.

7. Security Deposit . Tenant hereby agrees to pay to Landlord a security deposit of nine thousand four hundred fifty-three dollars and no cents ($9,453.00), which is equal to first month’s Base Rental, on the day this Lease is executed by Tenant (the “Security Deposit”). Upon the occurrence of any Event of Default by Tenant, Landlord may, from time to time, without prejudice to any other remedy, use the Security Deposit to the extent necessary to make good any arrears of Base Rental or Additional Rental or any other payment obligation hereunder, including, but not limited to, the cost of any damage, injury, expense, or liability caused by any Event of Default by Tenant hereunder. Any remaining balance of the Security Deposit shall be returned by Landlord to Tenant within a reasonable period of time after the termination or expiration of this Lease and the satisfaction of Tenant’s obligations hereunder. The Security Deposit shall not be considered an

advance payment of rental or a measure of Landlord's damages in case of default by Tenant. Tenant shall not be entitled to receive and shall not receive any interest on the Security Deposit, and Landlord may commingle the same with other monies of Landlord. In the event Landlord applies the Security Deposit or any portion thereof to the payment of any sum described above and this Lease is not terminated, Tenant shall immediately deposit with Landlord an amount of money equal to the amount so applied, and such amount shall be deemed to be part of the Security Deposit. In the event of a sale or transfer of Landlord’s interest in the Premises, Landlord shall have the right to transfer the Security Deposit to the purchaser or lessor, as the case may be, and upon any such transfer and acknowledgement of receipt of Security Deposit by such transferee, Landlord shall be relieved of all liability to Tenant for the return of the Security Deposit, and Tenant shall look solely to the new owner or lessor for the return of the Security Deposit.

8. Keys and Locks . Landlord shall furnish Tenant with two (2) keys for each standard lockset on code required doors entering the Premises from public areas. Additional keys will be Tenant’s responsibility and at Tenant's expense. All such keys shall remain the property of Landlord. Upon termination of this Lease, Tenant shall surrender to Landlord all keys to any locks on doors entering or within the Premises, and give to Landlord the explanation of the combination of all locks for safes, safe cabinets and vault doors, if any, in the Premises.

9. Entry for Repairs and Inspection . Upon reasonable prior notice from Landlord, Tenant shall permit Landlord and its contractors, agents or representatives to enter into and upon any part of the Premises during reasonable hours to inspect the same; perform maintenance and make repairs, replacements or improvements as set forth under this Lease; and for the purpose of showing the Premises to prospective tenants or purchasers. Landlord shall use its reasonable efforts not to interfere materially with the operation of Tenant's business during any such entry.

10. Laws and Regulations; Encumbrances . Tenant shall comply with, and Tenant shall cause its employees, contractors and agents to comply with, and shall use its best efforts to cause its visitors and invitees to comply with the following, to the extent Tenant has been made aware thereof: (i) all laws, ordinances, orders, rules and regulations of all state, federal, municipal and other governmental or judicial agencies or bodies relating to the use, condition or occupancy of the Premises; and (ii) all recorded easements, operating agreements, parking agreements, declarations, covenants and instruments encumbering the Premises. Copies of all documents described above must be provided to Tenant by Landlord upon Landlord receiving written request from Tenant for the specific documents. Landlord warrants that to Landlord’s knowledge, no such ordinances or other matters of record prohibit Tenant's use of the Premises as a branch banking facility.

11. Hazardous Substances . Tenant shall comply, at its sole cost and expense, with all laws, ordinances, orders, rules and regulations of all state, federal, municipal and other governmental or judicial agencies or bodies relating to the protection of public health, safety, welfare or the environment (collectively, “Environmental Laws”) in the use, occupancy and operation of the

Premises. Tenant agrees that no Hazardous Substances (defined below) shall be used, located, stored or processed on the Premises by Tenant or any of its agents, employees, contractors, assigns, subtenants, guest or invitees, and no Hazardous Substances will be released or discharged from the Premises. The term “Hazardous Substances” shall mean and include all hazardous and toxic substances, waste or materials, any pollutant or contaminant, including, without limitation, PCB’s, asbestos and raw materials that include hazardous constituents or any other similar substances or materials that are now or hereafter included under or regulated by any Environmental Laws or that would pose a health, safety or environmental hazard. Tenant hereby agrees to indemnify, defend and hold harmless Landlord from and against any and all losses, liabilities (including, but not limited to, strict liability), damages, injuries, expenses (including, but not limited to, court costs, litigation expenses, reasonable attorneys’ fees and costs of settlement or judgment), suits and claims of any and every kind whatsoever paid, incurred or suffered by, or asserted against, Landlord by any person, entity or governmental agency for, with respect to, or as a direct or indirect result of, the presence in or the escape, leakage, spillage, discharge, emission or release from the Premises of any Hazardous Substances by Tenant or any of its agents, employees, contractors, assigns, subtenants, guest or invitees. Tenant shall not be responsible for any Hazardous Substances located on the Premises prior to the date Landlord delivers the Premises to Tenant.

12. Taxes and Assessments.

a. Tenant shall pay all taxes, license fees, and special charges and assessments levied by any taxing authorities against personal property which Tenant owns and/or uses within, upon, or about the Premises, or by reason of the conduct and operation of its business thereon, including, without limitation, any special assessments or charges for water and/or sewers.

b. Tenant shall also pay its pro rata share of any and all ad valorem real estate taxes on the Premises and any personal property taxes assessable on any personal property located on the Premises on or before the same are due to the taxing authority. Tenant’s pro rata share shall be 14.8% as calculated by dividing the total rentable square footage of the building (17,810 square feet) by the square footage of the Tenant’s space (2,642 square feet). Landlord shall forward all ad valorem tax bills for the Premises to Tenant immediately upon receipt. Landlord shall have the right to pay such taxes before they become delinquent if Tenant has not paid as required under this Lease, and such payment on Tenant’s behalf shall be immediately payable to Landlord by Tenant as Additional Rental. The estimation for year one shall be $1 per square foot, which shall be paid monthly by Tenant as part of the triple net expenses. Tenant shall have the option to request backup for all of the taxes in order to verify the Tenant’s portion, and Landlord shall provide the information within 10 business days after the request has been received.

c. Notwithstanding the foregoing, Tenant shall have no obligation under this Lease to pay: (i) income, profits, intangible, documentary stamps, franchise, corporate, capital stock, succession, estate, gift or inheritance taxes; (ii) any assessment or additional tax associated with a change in ownership of the Premises; or (iii) governmentally imposed “impact fees” related to further improvement of the Premises, including, but not limited to, the widening of exterior roads, the installation of or connection to sewer lines, sanitary and storm drainage systems and other utility lines and installations.

d. Tenant shall indemnify Landlord against all taxes (on personal property and real property), licenses fees, special charges and assessments paid for by Landlord on Tenant’s behalf, and Tenant shall indemnify Landlord against all costs and expenses (including attorney fees) in connection with same. Amounts due Landlord hereunder shall be Additional Rental.

e. Tenant may at its sole cost and expense, and in its own name and/or in the name of Landlord, dispute and contest any of the above-described taxes, license fees, special charges, assessments and/or ad valorem real estate taxes by appropriate proceedings diligently conducted in good faith, but only after Tenant has deposited with Landlord or with an applicable competent authority, in Tenant’s reasonable discretion, the amount so contested and unpaid which shall be held by Landlord (if Landlord is so chosen to hold such deposited funds) in an interest-bearing account until the termination of the proceedings, at which time the amount deposited shall be applied by Landlord toward the payment of the items held valid (plus any court costs, interest, penalties and other liabilities associated with the proceedings), and Tenant's share of any excess shall be returned to Tenant. Tenant shall indemnify, defend and hold harmless Landlord from and against any cost, damage or expense, including attorney’s fees, actually and reasonably incurred by Landlord, as Additional Rental, in connection with any such proceedings.

13. Leasehold Improvements .

a. Following completion of Landlord’s Work (defined in Exhibit C hereto) and Tenant’s acceptance of the Premises from Landlord, subject to the "punch list" items and latent defects identified in accordance with Section 1(b) above, Tenant accepts the same “AS IS” without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements except as expressly set forth in this Lease. ADDITIONALLY, EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE, LANDLORD MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE LEASEHOLD IMPROVEMENTS OR TO LANDLORD’S WORK, AND ALL IMPLIED WARRANTIES WITH RESPECT TO THE PREMISES, INCLUDING WITHOUT LIMITATION THOSE OF SUITABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY EXPRESSLY NEGATED AND WAIVED.

b. Tenant shall be entitled to a Tenant Improvement Allowance (defined and set forth in Exhibit C ). Notwithstanding the Tenant Improvement Allowance, Tenant agrees that it will make no exterior or structural alterations or additions to the Premises nor post or attach or affix to the exterior of the Premises, any signs, air conditioners or other objects without memorializing such proposed alterations, attachments, or fixtures in a Tenant work letter (in form acceptable to Landlord) and obtaining Landlord’s prior written consent to same. Notwithstanding the foregoing, Tenant shall have the right to make interior, non-structural alterations to the Premises without Landlord's consent, so long as such alterations do not (i) affect the structure or electrical, plumbing, or mechanical systems of the Premises; or (ii) decrease the value of the Premises. Except as may be covered by Tenant’s Improvement Allowance, Tenant shall be responsible for the cost of such alterations or signs. Tenant shall have the right to install its trade fixtures and equipment in, upon and about the Premises; provided, however, that Tenant shall remove the same on or before the expiration of this Lease, and if so requested by Landlord, promptly after any termination of this Lease; and provided, further, that Tenant shall promptly thereafter repair all damage caused to the Premises by reason of such installation or removal.

c. Tenant shall indemnify and hold Landlord harmless from and against all costs (including reasonable attorneys' fees and costs of suit), losses, liabilities, or causes of action arising out of or relating to any alterations, additions or improvements made by Tenant to the Premises, including, but not limited to, work not completed in a workmanlike manner and any contractor’s, mechanics' or materialman's liens asserted in connection therewith. This indemnification obligation shall survive the Term of this Lease.

d. Should any contractor’s, mechanic's or other liens be filed against any portion of the Premises by reason of Tenant's acts or omissions or because of a claim against Tenant, Tenant shall cause the same to be canceled or discharged of record by bond or otherwise within thirty (30) days after notice by Landlord. If Tenant shall fail to cancel or discharge said lien or liens, within said thirty (30) day period, Landlord may, at its sole option, cancel or discharge the same and upon Landlord's demand, Tenant shall promptly reimburse Landlord for all reasonable costs incurred in canceling or discharging such liens, including attorney fees in connection with same.

14. Maintenance and Repairs to the Premises . Following completion of Landlord’s Work, but subject to any "punch list" items, latent defects, or other defects expressly covered by any warranty under this Lease, Tenant shall make and pay for any and all repairs or replacements to any and all portions of the interior and exterior of the Premises which are necessary to keep the same in a good state of repair or condition, such as, but not limited to, the roof and all structural members of the building, all fixtures, furnishings, lighting, air conditioning, plumbing, heating, electrical, floors, walls, ventilation systems, and any and all other parts of the building or other portions of the Premises. Tenant shall perform all maintenance, repairs, replacements and improvements required by any governmental law, ordination, rule or regulation. Landlord shall maintain the parking lot, landscaping, plantings, and the exterior of the Premises in a good and neat condition at all times, and Tenant shall be responsible for its pro rata share of the costs. Tenant’s pro rata share shall be 14.8% as calculated by dividing the total rentable square footage of the building

( 17,810 square feet) by the square footage of the Tenant’s space ( 2,642 square feet) . Tenant shall have the option to request backup for all of the expenses in order to verify the Tenant’s portion, and Landlord shall provide the information within 10 business days after the request has been received. Notwithstanding anything in this Lease to the contrary, Tenant shall not be required to construct or install any item that is capital in nature, unless the need for such installation or construction is caused by Tenant's negligence or willful misconduct. Without limiting Tenant’s maintenance and repair obligations hereunder, in the event Tenant fails to commence, within ten (10) days after written notice from Landlord to Tenant, or to diligently complete, any maintenance, repairs, replacements or improvements necessitated by Tenant’s negligence or willful conduct, or necessitated by Tenant’s waste of the Premises, Landlord may, at its option, perform any such maintenance, repairs, replacements or improvements deemed necessary by Landlord, and Tenant shall pay to Landlord on demand Landlord’s cost thereof, plus an administrative fee of ten percent (10%) of such costs as Additional Rental. As used in this Section 15, any requirement to maintain the Premises in a "good state of repair or condition" shall mean maintenance of the Premises in as good a condition as existed upon the initial completion of the improvements on the Premises, reasonable wear and tear and damage by casualty excepted.

15. Condemnation . If all or substantially all of the Premises, or such portion of the Premises as would render, in Landlord's reasonable judgment, the continuance of Tenant's business from the Premises impracticable, shall be permanently taken or condemned for any public purpose, then Landlord or Tenant may terminate this Lease. If less than all or substantially all of the Premises shall be taken, then Landlord shall have the option of terminating this Lease by written notice to Tenant within ten (10) days following the date of such condemnation or taking. If this Lease is terminated as provided above, this Lease shall cease and expire as of the date of the taking. In the event that this Lease is not terminated and a portion of the Premises is taken, Tenant shall pay the Base Rental and Additional Rental up to the date of the taking, and this Lease shall thereupon cease and terminate with respect to the portion of the Premises so taken. Thereafter the Base Rental and Additional Rental shall be adjusted on an equitable basis. If this Lease is not terminated, Landlord shall promptly repair the Premises’ building to an architectural unit, fit for Tenant's occupancy and business; provided, however, that Landlord's obligation to repair hereunder shall be limited to the extent of the net proceeds from such taking made available to Landlord for such repair. However, in the event such proceeds are not sufficient to restore the Premises to a condition reasonably suitable for the operation of Tenant’s business, Tenant may terminate this Lease, at the time Landlord notifies Tenant of the extent to which the Premises will be restored. In the event of any temporary taking or condemnation for any public purpose of the Premises or any portion thereof, this Lease shall continue in full force and effect except that Base Rental and Additional Rental shall be adjusted on an equitable basis for the period of such taking, and Landlord shall be under no obligation to make any repairs or alterations. In the event of any taking of the Premises, Tenant hereby assigns to Landlord the value of all or any portion of the unexpired term of the Lease and all leasehold improvements, and Tenant shall not assert a claim for a condemnation award therefor; provided, however, Tenant may pursue a separate award from the condemning authority for (a) relocation and moving expenses, and (b) compensation for loss of Tenant's business.

16. Fire or Casualty . If the building or any improvement on the Premises shall be damaged in any way, in whole or in part, or rendered untenantable by fire or other casualty, Tenant shall restore the building to its original condition. Rent shall not abate or be reduced following any casualty loss or during any period of restoration to the Tenant’s Premises if the fire is due to the Tenant’s Premises . It shall be Landlord ’s responsibility to obtain business interruption insurance coverage to insure against any loss Tenant may suffer as a resul t of any casualty damage by other leased space as well as Tenant’s inability to use all or any part of the Premises as a result of such casualty. Tenant shall pay its pro rata share on the business interruption insurance coverage, and Tenant’s pro rata share shall be 14.8 % as calculated by dividing the total rentable square footage of the building ( 17,810 square feet) by the square footage of the Tenant’s space ( 2,642 square feet) . Tenant shall have the option to request backup for all of the expenses in order to verify the Tenant’s portion, and Landlord shall provide the information within 10 business days after the request has been received.

17. Insurance .

a. Liability Insurance. Tenant shall, during the entire term hereof keep in full force and effect a policy or policies of public liability, personal and property damage insurance with respect to the Premises, in which the limits shall be not less than $2,000,000 in the aggregate, and $1,000,000 per occurrence. Such amounts shall be increased every three (3) years based on any increase in the Consumer Price Index-All Urban during such 3-year period. The policies shall name Landlord and any lender of Landlord as an additional insured, and shall contain a clause that the insurer will not cancel or change the insurance without first giving all additional insureds thirty (30) days' prior written notice. The insurance shall be with an insurance company licensed to do business in Tennessee, and a copy of the policy, or a certificate of insurance, shall be delivered to Landlord initially and at each renewal hereof.

b. Fire and Casualty Insurance. Landlord agrees to keep in full force and effect a policy or policies or broad form, all risk coverage insurance, in amounts not less than eighty percent (80%) of the reasonable reproduction or replacement value of the Premises improvements (including all buildings and structures thereon, and all portions thereof), determined annually, and with no reduction for depreciation, use, wear and tear. With respect to damage or destruction of Premises improvements, which damage or destruction is covered, in whole or in part, by insurance, it is agreed that the proceeds from such insurance which are paid to Landlord shall be used and applied exclusively for the purpose of making replacements or repairs, if and only if such proceeds are sufficient in amount to complete such necessary replacements or repairs, which are paid to Landlord are insufficient therefor, Landlord will provide the deficiency, it being the intent of the parties hereto that Landlord shall have the obligation to rebuild, reconstruct or replace the Premises improvements damaged or destroyed by fire or other casualty with improvements of equal value, whether such casualty shall be insured or not insured against, and whether the proceeds of any such insurance are paid to Landlord. The insurance shall be with a good and A-rated insurance company licensed to do business in Tennessee, and a copy of the policy, or a certificate of insurance together with proof of premium payment, shall be delivered to Tenant initially and at each renewal thereof. Tenant shall pay its pro rata share of all risk coverage insurance monthly as part of the triple net expenses.

Tenant’s pro rata share shall be 14.8 % as calculated by dividing the total rentable square footage of the building ( 17,810 square feet) by the square footage of the Tenant’s space ( 2,642 square feet) .

18. Damages from Certain Causes . Landlord shall not be liable or responsible to Tenant for any loss or damage to any property or person occasioned by theft, fire, act of God, public enemy, riot, strike, insurrection, war, act or omission of any party other than Landlord, any nuisance or interference caused or created by any property owner other than Landlord, requisition or order of governmental body or authority, court order or injunction, or any cause beyond Landlord's control or for any damage or inconvenience which may arise through repair or alteration of any part of the Premises as required by this Lease.

19. Hold Harmless .

a. Landlord shall not be liable to Tenant, its agents, servants, employees, contractors, customers or invitees for any damage to person or property caused by any act, omission or neglect of Tenant. Without limiting or being limited by any other indemnity in this Lease, but rather in confirmation and furtherance thereof, Tenant agrees to indemnify, defend by counsel reasonably acceptable to Landlord and hold Landlord harmless of, from and against any and all losses, damages, liabilities, claims, liens, costs and expenses (including, but not limited to, court costs, reasonable attorneys’ fees and litigation expenses) in connection with injury to or death of any person or damage to or theft, loss or loss of the use of any property occurring in or about the Premises arising from Tenant’s occupancy of the Premises, or the conduct of its business or from any activity, work, or thing done, permitted or suffered by Tenant in or about the Premises, or from any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed pursuant to the terms of this Lease, or due to any other act or omission or willful misconduct of Tenant or any of its agents, employees, contractors, assigns, subtenants, guest or invitees.

b. Tenant shall not be liable to Landlord, its agents, servants, employees, contractors, customers or invitees for any damage to person or property caused by any act, omission or neglect of Landlord. Without limiting or being limited by any other indemnity in this Lease, but rather in confirmation and furtherance thereof, Landlord agrees to indemnify, defend by counsel reasonably acceptable to Tenant and hold Tenant harmless of, from and against any and all losses, damages, liabilities, claims, liens, costs and expenses (including, but not limited to, court costs, reasonable attorneys’ fees and litigation expenses) in connection with injury to or death of any person or damage to or theft, loss or loss of the use of any property occurring in or about the Premises arising from any breach or default on the part of Landlord in the performance of any covenant or agreement on the part of Landlord to be performed pursuant to the terms of this Lease, or due to any other grossly negligent act or omission or willful misconduct of Landlord or any of its agents or employees.

20. Default and Remedies .

The occurrence of any of the following shall constitute a default under and breach of this Lease by Tenant (an “Event of Default”):

Failure by Tenant to pay any monetary amounts (including Base Rental and Additional Rental) due hereunder within ten (10) days following written notice of non-payment from Landlord to Tenant;

ii)

Abandonment of the Premises (defined as any period of one hundred and eighty (180) consecutive days without operation of Tenant's business in the Premises);

iii)

Failure by Tenant to observe or perform any of the covenants in respect of assignment and subletting of this Lease;

iv)

Failure by Tenant to cure forthwith, immediately after receipt of notice from Landlord, any hazardous condition which Tenant has created or permitted in violation of law or of this Lease;

Failure by Tenant to complete, execute and deliver any instrument or document required to be completed, executed and delivered by Tenant within twenty (20) days after the initial written demand for same to Tenant;

vi)

Failure by Tenant to observe or perform any other non-monetary covenant, agreement, condition or provision of this Lease, if such failure shall continue for thirty (30) days after written notice thereof from Landlord to Tenant; provided that such thirty (30) day period shall be extended for the time reasonably required to complete such cure, if such failure cannot reasonably be cured within said thirty (30) day period and Tenant commences to cure such failure within said thirty (30) day period and thereafter diligently and continuously proceeds to cure such failure;

vii)

The levy upon execution or the attachment by legal process of the leasehold interest of Tenant, or the filing or creation of a lien in respect of such leasehold interest, which lien shall not be released or discharged within thirty (30) days from the date of such filing;

viii)

Tenant or any guarantor of Tenant's obligations under this Lease becomes insolvent or bankrupt or admits in writing its inability to pay its debts as they mature, or makes an assignment for the benefit of creditors, or applies for or consents to the appointment of a trustee or receiver for all or a major part of its property;

ix)

A trustee or receiver is appointed for Tenant, any guarantor of Tenant's obligations under this Lease or for a major part of either party’s property and is not discharged within sixty (60) days after such appointment;

Any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding for relief under any bankruptcy law or similar law for the relief of debtors, is instituted (A) by Tenant or any guarantor of Tenant's obligations under this Lease, or (B) against Tenant or any guarantor of Tenant's obligations under this Lease and is allowed against it or is consented to by it or is not dismissed within sixty (60) days after such institution; or

xi)

Tenant's repeated failure to observe or perform any of the other covenants, terms or conditions hereof more than three (3) times, in the aggregate, in any period of twelve (12) consecutive months.

Upon the occurrence of an Event of Default, Landlord agrees to use reasonable efforts to mitigate its damages, but shall have the option to do and perform any one or more of the following in addition to, and not in limitation of, any other remedy or right permitted it by law or in equity or by this Lease:

Landlord, with or without terminating this Lease, may immediately or at any time thereafter re-enter the Premises and correct or repair any condition which shall constitute a failure on Tenant's part to keep, observe, perform, satisfy, or abide by any term, condition, covenant, agreement, or obligation of this Lease, and Tenant shall fully reimburse and compensate Landlord, for Landlord’s actual cost incurred, on demand.

ii)

Landlord, with or without terminating this Lease, may immediately or at any time thereafter demand in writing that

Tenant vacate the Premises and thereupon Tenant shall vacate the Premises and remove therefrom all property thereon belonging to or placed on the Premises by, at the direction of, or with consent of Tenant within ten (10) days of receipt by Tenant of such notice from Landlord, whereupon Landlord shall have the right to re-enter and take possession of the Premises.

iii)

Landlord, with or without terminating this Lease, may immediately or at any time thereafter, re-enter the Premises and remove therefrom Tenant and all property belonging to or placed on the Premises by, at the direction of, or with consent of Tenant. Any such re-entry and removal by Landlord shall not of itself constitute an acceptance by Landlord of a surrender of this Lease or of the Premises by Tenant and shall not of itself constitute a termination of this Lease by Landlord.

iv)

Landlord, with or without terminating this Lease, may immediately or at any time thereafter relet the Premises or any part thereof for such time or times, at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable, and Landlord may make any alterations or repairs to the Premises which it may deem necessary or proper to facilitate such reletting; and Tenant shall pay all reasonable costs of such reletting; and if this Lease shall not have been terminated, Tenant shall continue to pay all rent and all other charges due under this lease up to and including the date of beginning of payment of rent by any subsequent tenant of part or all of the Premises, and thereafter Tenant shall pay monthly during the remainder of the term of this Lease the difference, if any, between the rent and other charges collected from any such subsequent tenant or tenants and the rent and other charges reserved in this Lease, but Tenant shall not be entitled to receive any excess of any such rents collected over the rents reserved herein.

Landlord may immediately or at any time thereafter terminate this Lease, and this Lease shall be deemed to have been terminated upon receipt by Tenant of written notice of such termination; upon such termination Landlord shall recover from Tenant all damages Landlord may suffer by reason of such termination including, without limitation, unamortized sums expended by Landlord for leasing commissions and

construction of tenant improvements, all arrearages in rentals, costs, charges, additional rentals, and reimbursements, the cost (including court costs and attorneys' fees) of recovering possession of the Premises, the cost of any alteration of or repair to the Premises which is necessary or proper to prepare the same for reletting and, in addition thereto, Landlord at its election shall have and recover from Tenant either (A) an amount equal to the excess, if any, of the total amount of all rents and other charges to be paid by Tenant for the remainder of the term of this Lease over the then reasonable rental value of the Premises for the remainder of the term of this Lease, or (B) the rents and other charges which Landlord would be entitled to receive from Tenant pursuant to the provisions of subsection (iv) if the Lease were not terminated. Such election shall be made by Landlord by serving written notice upon Tenant of its choice of one of the two said alternatives within thirty (30) days of the notice of termination.

vi)

The exercise by Landlord of any one or more of the rights and remedies provided in this Lease shall not prevent the subsequent exercise by Landlord of any one or more of the other rights and remedies herein provided. All remedies provided for in this Lease are cumulative and may, at the election of Landlord, be exercised alternatively, successively, or in any other manner and are in addition to any other rights provided for or allowed by law or in equity.

vii)

No act by Landlord with respect to the Premises shall terminate this Lease, including, but not limited to, acceptance of the keys, institution of an action for detainer or other dispossessory proceedings, it being understood that this Lease may only be terminated by express written notice from Landlord to Tenant, and any reletting of the Premises shall be presumed to be for and on behalf of Tenant, and not Landlord, unless Landlord expressly provides otherwise in writing to Tenant.

(c)

In the event Landlord fails to perform any of its obligations under this Lease and such non-performance continues for a period of thirty (30) days following written notice of default from Tenant, Landlord shall be deemed to be in material default of this Lease, and Tenant shall have all remedies available at law, in equity or under this Lease; provided, however, that such thirty (30) day period shall be extended for the time reasonably required to complete such cure, if such failure cannot reasonably be cured within said thirty (30) day period and Landlord commences to cure such failure within said thirty (30) day

period and thereafter diligently and continuously proceeds to cure such failure .

21. Late Payments . In the event any installment of any Rental owed by Tenant hereunder is not paid within 10 days, Tenant shall pay a late charge equal to the greater of $100.00 or five percent (5%) of the amount due. The parties agree that such charge is a fair and reasonable estimate of Landlord’s administrative expense incurred on account of late payment. Should Tenant make a partial payment of past due amounts, the amount of such partial payment shall be applied first to reduce all accrued and unpaid late charges, in inverse order of their maturity, and then to reduce all other past due amounts, in inverse order of their maturity.

22. Attorney's Fees . If either party initiates any action to enforce its rights under this Lease or the terms hereof, the prevailing party shall be entitled to collect from the other party all court costs, reasonable attorneys fees and litigation expenses, including, but not limited to, costs of depositions and expert witnesses, that the prevailing party actually incurs in connection with such action.

23. No Waiver of Rights . No failure or delay of Landlord to exercise any right or power given it herein or to insist upon strict compliance by Tenant of any obligation imposed on it herein and no custom or practice of either party hereto at variance with any term hereof shall constitute a waiver or a modification of the terms hereof by Landlord or any right it has herein to demand strict compliance with the terms hereof by Tenant. No waiver of any right of Landlord or any default by Tenant on one occasion shall operate as a waiver of any of Landlord's other rights or of any subsequent default by Tenant. No express waiver shall affect any condition, covenant, rule, or regulation other than the one specified in such waiver and then only for the time and in the manner specified in such waiver. No person has or shall have any authority to waive any provision of this Lease unless such waiver is expressly made in writing and signed by an authorized officer of Landlord.

24. Holding Over . In the event of holding over by Tenant after expiration or termination of this Lease without the written consent of Landlord, Tenant shall pay as rent for such holdover period one hundred fifty percent (150%) of the Rental that would have been payable if this Lease had not so terminated or expired). No holding over by Tenant after the term of this Lease shall be construed to extend this Lease, and Tenant shall be deemed a tenant at will, terminable on five (5) days notice from Landlord. In the event of any unauthorized holding over, Tenant shall indemnify Landlord against all claims for damages by any other tenant to whom Landlord shall have leased all or any part of the Premises effective upon the termination of this Lease.

25. Subordination .

a. If this Lease (and all its terms and conditions) shall become subject and subordinate to any mortgages or deeds of trust covering the Premises, whether or not for the full amount of all advances made or to be made thereunder and without regard to the time or character of

such advances, the holder of any such mortgage or deed of trust (any of the foregoing, a “Holder”), shall execute a subordination, non-disturbance and attornment agreement in form and content reasonably acceptable to Tenant and such mortgagee providing (in part) that as long as an event of default on the part of Tenant is not in existence, Tenant shall not be disturbed in its possession of the Premises or have its rights hereunder terminated or modified by such mortgagee, except pursuant to the provisions of this Lease.

b. Tenant agrees that if Landlord defaults in the performance or observance of any covenant or condition of this Lease required to be performed or observed by Landlord hereunder, Tenant will give written notice specifying such default by certified or registered mail, postage prepaid, to any Holder of which Tenant has been notified in writing, and before Tenant exercises any right or remedy which it may have on account of any such default of Landlord, such party shall have the same amount of time as is afforded Landlord to cure such default of Landlord. Whether or not any deed of trust or mortgage is foreclosed, or any Holder succeeds to any interest of Landlord under this Lease, no Holder shall have any liability to Tenant for any security deposit paid to Landlord by Tenant hereunder, unless such security deposit has actually been received by such Holder. No Holder of which Tenant has been notified, in writing, shall be bound by any amendment or modification of this Lease made without the written consent of such Holder, nor shall any such party be liable for any defaults of Landlord under this Lease. If the Landlord goes into default, the holder shall be responsible to refund the Tenant’s security deposit.

26. Estoppel Certificate . Tenant agrees that, from time to time upon request by Landlord, or any existing or prospective mortgagee or ground lessor, Tenant will complete, execute and deliver a written estoppel certificate certifying (a) that this Lease is unmodified and is in full force and effect (or if there have been modifications, that this Lease, as modified, is in full force and effect and setting forth the modifications); (b) the amounts of the monthly installments of Base Rental, Additional Rental and other sums then required to be paid under this Lease by Tenant; (c) the date to which the Base Rental, Additional Rental and other sums required to be paid under this Lease by Tenant have been paid; (d) that Landlord is not in default under any of the provisions of this Lease, or if in default, the nature thereof in detail and what is required to cure same; and (e) such other information concerning the status of this Lease or the parties' performance hereunder reasonably requested by Landlord or the party to whom such estoppel certificate is to be addressed.

27. Sublease or Assignment by Tenant .

a. The Tenant shall not, without the Landlord's prior written consent, (i) assign, convey, mortgage, pledge, encumber, or otherwise transfer (whether voluntarily, by operation of law, or otherwise) this Lease or any interest hereunder; (ii) allow any lien to be placed upon Tenant's interest hereunder; (iii) sublet the Premises or any part thereof; or (iv) permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant or Tenant’s subsidiaries. Any attempt to consummate any of the foregoing without Landlord's consent shall be void and of no force or effect. For purposes hereof, the transfer of the ownership or voting rights in a controlling

interest of the voting stock of Tenant (if Tenant is a corporation) or the transfer of a general partnership interest or a majority of the limited partnership or membership interest in Tenant (if Tenant is a partnership or limited liability company), at any time throughout the term of this Lease, shall be deemed to be an assignment of this Lease.

b. For any proposed assignment or subletting Tenant shall submit to Landlord a copy of the proposed sublease or assignment, and such additional information concerning the business, reputation and creditworthiness of the proposed sublessee or assignee as shall be sufficient to allow Landlord to form a commercially reasonable judgment with respect thereto. If Landlord approves any proposed sublease or assignment, Landlord shall receive from Tenant as Additional Rental fifty percent (50%) of any rents or other sums received by Tenant pursuant to said sublease or assignment in excess of the rentals payable to Landlord by Tenant under this Lease (after deducting all of Tenant's reasonable costs associated therewith, including reasonable brokerage fees and the reasonable cost of remodeling or otherwise improving the Premises for said sublessee or assignee), as such rents or other sums are received by Tenant from the approved sublessee or assignee. Landlord may require that any rent or other sums paid by a sublessee or assignee be paid directly to Landlord.

c. Notwithstanding the giving by Landlord of its consent to any subletting, assignment or occupancy as provided hereunder or any language contained in such lease, sublease or assignment to the contrary, unless this Lease is expressly terminated by Landlord, Tenant shall not be relieved of any of Tenant's obligations or covenants under this Lease and Tenant shall remain fully liable hereunder.

d. Notwithstanding anything in this Lease to the contrary, so long as Tenant remains jointly and severally liable for all of its obligations under this Lease, Tenant shall have the right, without Landlord's consent, to assign or transfer its interest in this Lease: (i) in connection with a merger or reorganization of Tenant or a sale of all or substantially all of Tenant's assets (so long as such assignee expressly assumes all of Tenant's obligations under this Lease in writing); (ii) to an entity wholly or partially owned or controlled by, or under common control with, Tenant; or (iii) to an entity whose (A) net worth is equal to or greater than the greater of the net worth or Tenant (1) on the date of this Lease or (2) at the time of such assignment; and (B) use of the Premises will be for banking and financial services; general business office use; or any other reputable business activity approved by Landlord in its reasonable discretion.

28. Quiet Enjoyment . Landlord covenants that Tenant shall and may peacefully have, hold and enjoy the Premises free from hindrance by Landlord or any person claiming by, through or under Landlord but subject to the other terms hereof, provided that Tenant pays the Base Rental, Additional Rental, and any other sums herein recited to be paid by Tenant and performs all of Tenant's covenants and agreements herein contained. It is understood and agreed that this covenant and any and all other covenants of Landlord contained in this Lease shall be binding upon Landlord and its successors only with respect to breaches occurring during the ownership of the Landlord's interest hereunder.

29. Assignment by Landlord . Landlord shall have the right to transfer and assign, in whole or in part, all its rights and obligations hereunder, in the Premises, and in such event and upon such transfer no further liability or obligation shall thereafter accrue against Landlord hereunder.

30. Limitation of Landlord's Personal Liability . Tenant specifically agrees to look solely to Landlord's equity interest Premises for the recovery of any monetary judgment against Landlord, it being agreed that Landlord (and its partners, members and shareholders) shall never be personally liable for any such judgment. The provision contained in the foregoing sentence is not intended to, and shall not, limit any right that Tenant might otherwise have to obtain injunctive relief against Landlord or Landlord's successors-in-interest or any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord.

31. Force Majeure . Landlord and Tenant (except with respect to the payment of Base Rental or Additional Rental or any other monetary obligation under this Lease) shall be excused for the period of any delay and shall not be deemed in default with respect to the performance of any of the terms, covenants and conditions of this Lease when prevented from so doing by a cause or causes beyond the Landlord's or Tenant's (as the case may be) control (excluding financial inability to perform), which shall include, without limitation, all labor disputes, governmental regulations or controls, fire or other casualty, inability to obtain any material or services, acts of God, or any other cause not within the reasonable control of Landlord or Tenant (as the case may be).

32. Surrender of Premises . Upon the termination of this Lease by lapse of time or otherwise or upon the earlier termination of Tenant’s right of possession, Tenant shall quit and surrender possession of the Premises (including all leasehold improvements made or installed by Tenant or by Landlord) to Landlord, broom clean, in the same condition as upon delivery of possession to Tenant hereunder, normal wear and tear excepted. Before surrendering possession of the Premises, Tenant shall, without expense to Landlord, remove all signs, furnishings, equipment, trade fixtures, merchandise and other personal property installed or placed in the Premises and all debris and rubbish, and Tenant shall repair all damage to Premises resulting from such removal. If Tenant fails to remove any of the signs, furnishings, equipment, trade fixtures, merchandise and other personal property installed or placed in the Premises by the expiration of the Term or earlier termination of this Lease, then Landlord may, at its sole option, (i) deem any or all of such items abandoned and the sole property of Landlord; or (ii) remove any and all such items and dispose of same in any manner. Tenant shall pay Landlord on demand any and all expenses incurred by Landlord in the removal of such items, including, without limitation, the cost of repairing any damage to the Premises caused by such removal and storage charges (if Landlord elects to store such property).

33. Notices . Any notice or other communications required or permitted to be given under this Lease must be in writing and shall be effectively given or delivered if (a) hand delivered to the addresses for Landlord and Tenant stated below, (b) sent by certified or registered United States Mail, return receipt requested, to said addresses, (c) sent by nationally recognized overnight courier (such as Federal Express, UPS Next Day Air or Airborne Express), with all delivery charges paid by the sender and signature required for delivery, to said address; or (d) sent by facsimile to the facsimile numbers for Landlord and Tenant stated below and actually received, as evidenced by facsimile confirmation report, by Landlord or Tenant, as the case may be. Any notice mailed shall be deemed to have been given upon receipt or refusal thereof. Notice effected by hand delivery shall be deemed to have been given at the time of actual delivery. Either party shall have the right to change its address to which notices shall thereafter be sent and the party to whose attention such notice shall be directed by giving the other party notice thereof in accordance with the provisions of this Section.


Landlord:	Nolensville Real Estate Partners, LLC
	320 Main Street, Suite 230
	Franklin, Tennessee 37064
	Facsimile: (615) 794-7910

Tenant:	Franklin Synergy Bank
	722 Columbia Avenue
	Franklin, TN 37064
	Phone: (615) 236-2265

34. Right of First Refusal . If Landlord elects to sell the Property during the Term of this Lease, Tenant shall have a right of first refusal to purchase the Property. The purchase price shall be an amount that exceeds, by at least $100.00, the amount of the bona fide offer to purchase the Property, made by any third party potential purchaser. Tenant may only exercise this option if presented with a bona fide offer to purchase, from a third party potential purchaser, and shall only exercise this option, if at all, by giving Landlord, or its heirs, successors, or assigns, written notice. Such written notice must be delivered to landlord within five (5) business days of Tenant's receipt from Landlord of a bona fide offer to purchase the Property. The agreement shall close and the purchase price shall be paid in full within thirty (30) days of written notice by Tenant of the exercise of said option. Rental payments shall continue and shall be prorated to the date of such closing. If Tenant does not exercise this option within five (5) business days of the option becoming available to Tenant in accordance with the terms expressed herein, this option and the rights of Tenant to exercise such option automatically and immediately terminate. This option may not be assigned without the express 'Written consent of Landlord and may not be exercised if Tenant is in default under the terms of this Agreement.

35. Miscellaneous .

a. This Lease shall be binding upon and inure to the benefit of the successors and assigns of Landlord, and shall be binding upon and inure to the benefit of Tenant, its successors, and, to the extent assignment may be approved by Landlord hereunder, Tenant's assigns.

b. All rights and remedies of Landlord and Tenant under this Lease shall be cumulative and none shall exclude any other rights or remedies allowed by law. This Lease is declared to be a Tennessee contract, and all of the terms hereof shall be construed according to the laws of the State of Tennessee.

c. This Lease may not be altered, changed or amended, except by an instrument in writing executed by all parties hereto.

d. If Tenant is a corporation, partnership, limited liability company or other entity, Tenant warrants that all consents or approvals required of third parties (including but not limited to its Board of Directors, partners or members) for the execution, delivery and performance of this Lease have been obtained and that Tenant has the right and authority to enter into and perform its covenants contained in this Lease.

e. To the extent permitted by applicable law, the parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this lease, the relationship of landlord and tenant, Tenant’s use or occupancy of the Premises and/or any claim of injury or damage. In the event Landlord commences any proceedings for nonpayment of rent or any other amounts payable hereunder, Tenant shall not interpose any counterclaim of whatever nature or description in any such proceeding, unless the failure to raise the same would constitute a waiver thereof. This shall not, however, be construed as a waiver of Tenant’s right to assert such claims in any separate action brought by Tenant.

f. If any term or provision of this Lease, or the application thereof to any person or circumstance, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and shall be enforceable to the extent permitted by law.

g. Time is of the essence in this Lease.

h. Tenant represents and warrants to Landlord that Tenant did not deal with any broker in connection with this Lease. Tenant shall indemnify, defend and hold Landlord harmless of, from and against any and all losses, damages, liabilities, claims, liens, costs and expenses (including, without limitation, court costs, reasonable attorneys’ fees and litigation expenses) arising from any claims or demands of any other broker or brokers or finders for any commission alleged to be due such other broker or brokers or finders claiming to have dealt with

Tenant in connection with this Lease or with whom Tenant hereafter deals or whom Tenant employs.

i. If Tenant comprises more than one person, corporation, partnership, limited liability company or other entity, the liability hereunder of all such persons, corporations, partnerships or other entities shall be joint and several.

j. Landlord’s receipt of any monetary amount due hereunder (including Base Rental and Additional Rental) payable by Tenant hereunder with knowledge of the breach of a covenant or agreement contained in this Lease shall not be deemed a waiver of the breach. No acceptance by Landlord of a lesser amount than the full and complete installment of monetary amount due under this Lease (including Base Rental and Additional Rental) which is due shall be considered, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed, an accord and satisfaction. Landlord may accept a check or payment without prejudice to Landlord’s right to recover the balance due or to pursue any other remedy provided in this Lease.

k. Submission of this instrument for examination shall not constitute a reservation of or option to lease the Premises or in any manner bind Landlord, and no lease or obligation on Landlord shall arise until this instrument is signed and delivered by Landlord and Tenant.

l. Any claim, cause of action, liability or obligation arising under the term of this Lease and under the provisions hereof in favor of a party hereto against or obligating the other party hereto and all of Tenant's indemnification obligations hereunder shall survive the expiration or any earlier termination of this Lease.

m. Tenant shall have the maximum exterior signage as approved by the City of Nolensville codes. All exterior signage shall be approved by the Landlord. Landlord approves the use of any temporary signage within the city codes.

[Signature page follows.]

IN WITNESS WHEREOF , the parties hereto have executed and sealed this Lease as of the date aforesaid.


LANDLORD:

NOLENSVILLE REAL ESTATE PARTNERS, LLC

By:	/s/Henry W. Brockman, Jr.
Title:	President & Managing Partner

TENANT:

FRANKLIN SYNERGY BANK

By:	/s/Christopher J. Black
Title:	Executive Vice President, Chief Financial Officer

EXHIBIT A

Description of Premises

All that tract or parcel of land in Williamson County, Tennessee, and being more particularly described as follows:

LOT 3 - SHELDON VALLEY SUBDIVISION

A TRACT OF LAND IN THE 17TH CIVIL DISTRICT OF WILLIAMSON COUNTY, CITY OF NOLENSVILLE, TENNESSEE, BEING LOT NO. 3 ON THE PLAN OF SHELDON VALLEY SUBDIVISION AS OF RECORD IN PLAT BOOK P53, PAGE 130, REGISTER'S OFFICE FOR WILLIAMSON COUNTY, TENNESSEE.

BEING THE SAME PROPERTY CONVEYED TO SV RETAIL, LLC AS OF RECORD IN BOOK 7138, PAGE 348, REGISTER'S OFFICE FOR WILLIAMSON COUNTY, TENNESSEE.

ADDRESS OF THE PROPERTY IS 7216 NOLENSVILLE ROAD; SUITE 100

The building has a load factor of 1.024, which consists of the first floor lobby of 242 square feet divided by the usable square feet of 2,580 for the banking facility and 7,395 usable square feet on the second floor, which totals 9,975. Thus, to determine the amount of rentable square feet, the load factor is multiplied by the usable square feet. This lease consists of 2,580 usable square feet, so the amount of rentable square feet is 2,642.

EXHIBIT B

Form of Commencement Agreement

COMMENCEMENT AGREEMENT

THIS COMMENCEMENT AGREEMENT (this “Agreement”), made and entered into as of this ___day of ____________, 20__, is by and between NOLENSVILLE REAL ESTATE PARTNERS, LLC , a Tennessee limited liability company, (“Landlord”), and FRANKLIN SYNERGY BANK , a Tennessee banking corporation (“Tenant”).

A. Tenant and Landlord entered into that certain Triple Net Office Lease Agreement dated __ May 6, 2019 ____________ (the “Lease”), for certain improved real property municipally known as __ 7216 Nolensville Road _____ located in Spring Hill, Williamson County, Tennessee, consisting of approximately _ 3,892 _____ rentable square feet, being more particularly described in the Lease; and

B. The parties desire to precisely establish the Commencement Date as set forth below.

NOW, THEREFORE, in consideration of the mutual and reciprocal promises herein contained, and pursuant to Section 2 of the Lease, Tenant and Landlord hereby agree that the Lease is hereby modified as follows :

1. The term of the Lease by and between Landlord and Tenant actually commenced on _________________________ (the “Commencement Date”).

2. Except as modified and amended by this Agreement, the Lease shall remain in full force and effect.

IN WITNESS WHEREOF , Landlord and Tenant have caused this Agreement to be duly executed, as of the day and year first above written.


LANDLORD:		TENANT:
NOLENSVILLE REAL ESTATE PARTNERS		FRANKLIN SYNERGY BANK

By:	___________________________________	By:	________________________________
Title:	___________________________________	Title:	________________________________

EXHIBIT C

Landlord’s Work and Tenant Improvement Allowance

Landlord’s Work

Before the Commencement Date, Landlord shall complete on the Premises construction of the one-story, cold “dark shell” building shown on the plans and drawings, consisting of approximately 3,892 rentable square feet and shall include base electrical, plumbing, and mechanical systems (the “Landlord’s Work”). Landlord anticipates that Landlord’s Work shall be complete by February 1, 2020, but Landlord does not guarantee this anticipated completion date and Tenant represents and warrants that it is not relying on this anticipated completion date. Notwithstanding the foregoing, if Landlord's Work is not complete by June 1, 2020, Tenant shall have a continuing right to terminate this Lease upon written notice to Landlord, in which event neither party shall have any further obligation to the other hereunder.

Landlord warrants to Tenant that Landlord's Work shall be completed (i) in a good and workmanlike manner and (ii) in accordance with the requirements of all applicable laws, codes and ordinances of governmental authorities having jurisdiction over the Premises. Landlord further hereby assigns to Tenant all third-party warranties granted to Landlord in connection with Landlord's Work.

Tenant Improvement Allowance

Following completion of Landlord’s Work and delivery of the Premises to Tenant, Landlord shall provide Tenant with an improvement allowance (the “Tenant Improvement Allowance”) of $30 per square foot of the building constructed under Landlord’s Work. The Tenant Improvement Allowance shall be payable to Tenant no earlier than the Commencement Date.

Exhibit 10.3

Severance Agreement and General Release

This Severance Agreement and Mutual Release (“Severance Agreement”) is made this 7 ^th day of May, 2019 by and between Sally E. Bowers (hereinafter “ Ms. Bowers ”) and Franklin Synergy Bank, a Tennessee banking corporation (the “ Bank ”) (and Ms. Bowers and Bank sometimes hereinafter collectively referred to as the “ Parties ”).

WHEREAS, Ms. Bowers has been an employee of the Bank pursuant to which Ms. Bowers has served as the Executive Vice President/Chief Mortgage Officer of the Bank;

WHEREAS, the Bank and Ms. Bowers are parties to that certain Confidentiality, Non-Competition and Non-Solicitation Agreement dated January 29, 2014 (the “ Non-Compete Agreement ”) pursuant to which the Bank and Ms. Bowers have certain obligations to each other following Ms. Bower’s separation from employment with the Bank;

WHEREAS, the Bank and Ms. Bowers are parties to that certain Employment Agreement dated January 29, 2014 (the “ Employment Agreement ”) pursuant to which the Bank and Ms. Bowers have certain obligations to each other following Ms. Bowers’ separation from employment with the Bank;

WHEREAS, Ms. Bowers desires to voluntarily resign her employment; and

WHEREAS the Bank wishes to accept Ms. Bowers’ resignation and resolve any and all issues surrounding the termination of Ms. Bowers’ employment with the Bank in this Agreement.

NOW, THEREFORE, in consideration of the foregoing promises and the terms stated herein, it is mutually agreed between the parties as follows:

1. Separation From Employment . Ms. Bowers’ separation from employment with the Bank is effective on May 10, 2019 (the “Separation Date”), and all obligations between the parties under the Employment Agreement and the Non-Compete Agreement subsequent to Ms. Bowers’ separation will be calculated, applied and interpreted based upon such Separation Date.

2. Cessation of Regular Compensation . The Bank will pay Ms. Bowers’ all earned wages up to her Separation Date. These wages will be paid through the normal payroll processes, including applicable taxes and withholding. Except as provided in Section 4 of this Agreement, Ms. Bowers shall not be entitled to any additional compensation of any kind whatsoever from the Bank from and after the Separation Date under the Employment Agreement, the Non-Compete Agreement or from any other circumstances.

3. Non-Compete Agreement. Ms. Bowers’ obligations under Section 4 of the Non-Compete Agreement shall continue until the one year anniversary of Ms. Bowers’ Separation Date. The Bank’s obligations to Ms. Bowers pursuant to Section 4 of this Agreement shall continue for the period provided therein so long as Ms. Bowers is not in violation of her obligations under Section 4 of the Non-Compete Agreement.

4. Total Severance Payment. In consideration for Ms. Bowers ’ obligations under the Non- Compete Agreement, the Bank shall pay Ms. Bowers twelve (12) months of Ms. Bowers’ current base pay of $132,934.00 less applicable taxes and withholding. The severance amount, less the deductions noted above , will be payable to Ms. Bowers in equal bi- monthly installments of $5,538.92 on the 15 ^th day and the last day of each calendar month commencing May 15, 2019. Additionally, the Bank shall pay Ms. Bowers one (1) times the average cash incentive bonus based on the last three (3) years averaged cash incentive bonus pay (which is equal to a total of $6,866.21 less applicable taxes and withholding) and will be paid in equal bi-monthly installments of $286.09 on the 15 ^th day of the month and the last day of each month beginning on May 15, 2019 .

5. Treatment of Stock Options and Restricted Stock. As a result of Ms. Bowers’ resignation, any unvested awards of options, restricted stock, stock appreciation rights, or other forms of equity compensation or awards shall become fully vested as of Ms. Bowers’ Separation Date regardless of the terms of the 2017 Omnibus Equity Incentive Plan and any Awards and Award notices (as defined in such plan), and any other documents and plans pursuant to which such award of equity compensation was awarded.

6. Termination of All Fringe Benefits at Separation Date . Ms. Bowers’ coverage under the Bank’s short term disability, long term disability, executive life and other employee benefit programs will end on the Separation Date. Ms. Bowers’ coverage under the Bank’s healthcare program and policies, including medical, dental, and vision, will end at 11:59 p.m. on May 31, 2019. Ms. Bowers shall be eligible to continue health insurance coverage for herself through COBRA for as long as otherwise provided under COBRA, and subject to Ms. Bowers’ payment of any required premiums. Information regarding COBRA continuation coverage will be mailed to Ms. Bowers in the ordinary course of business.

7. Release of Age and All Other Claims . Ms. Bowers agrees not to file, pursue or prosecute any suit, charge, complaint, action or claim of any nature whatsoever (and whether known or unknown) arising out of Ms. Bowers’ employment with the Bank, its subsidiaries, parent companies, and affiliated companies, or Ms. Bowers’ separation from such employment. Ms. Bowers further hereby individually and collectively, for herself, her estate, agents, attorneys, successors, heirs, executors, administrators, insurers and assignees, irrevocably and unconditionally releases and discharges the Bank and its respective related subsidiaries, parent companies, and their respective agents, directors, parent corporations, sister corporations, subsidiary corporations, affiliates, officers, employees, representatives, attorneys, insurers, predecessors and successors (hereinafter collectively referred to as the “ Releasees ”) from any and all actions, causes of action, suits, debts, charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages and expenses (including attorney’s fees and cost actually incurred) of any nature whatsoever, in law or equity, whether known or unknown, which Ms. Bowers ever had, or may have had, against Releasees since the beginning of time to the execution of this Agreement.

Claims being released under this Agreement include, but are not limited to, any and all claims against the Releasees arising under any federal, state, or local statutes, ordinances, resolutions, regulations, constitutional provisions and/or common law(s), from any and all actions, causes of action, lawsuits, debts, charges, complaints, liabilities, obligations, promises, agreements, controversies, damages and expenses of any and every nature whatsoever, both legal

and equitable, whether known or unknown, which Ms. Bowers had, has ever had, now has or may have against the Releasees as of the date of execution of this Agreement, including, but not limited to:

(i) any and all claims which were, or could have been, asserted in any lawsuit or administrative action or proceeding;

(ii) any and all claims arising out of Ms. Bowers’ employment by the Releasees and Ms. Bowers’ separation from that employment;

(iii) any and all claims of discrimination or retaliation arising under local, state or federal law including, but not limited to, Title VII of the Civil Rights Act of 1964; 42 U.S.C. §§ 1981, 1981A, 1983 and 1985; the Age Discrimination in Employment Act; the Americans With Disabilities Act; the Federal Rehabilitation Act of 1973; the Older Workers Benefit Protection Act; the Family and Medical Leave Act of 1993; the Genetic Information Nondiscrimination Act; the Employee Retirement Income Security Act of 1974; Executive Order 11246; the Tennessee Human Rights Act; each, as amended, any other similar federal, state, or local law or regulation, any claim for race, color, sex, age, disability, religious, and/or other forms of unlawful discrimination or harassment or retaliation, any claim under federal, state, local, or common law, any claim for breach of contract, any claim for wrongful discharge, any claim for outrageous conduct or intentional infliction of emotional distress, any claim for negligent or reckless infliction of emotional distress, any claim for assault or battery, any claim for retaliatory discharge or constructive discharge, any claim for defamation, libel or slander, any and all state law tort claims, and any and all claims that could have been brought by Ms. Bowers against Releasees arising out of or related to Ms. Bowers’ employment with, and/or separation of employment from the Bank;

(iv) any and all tort claims including, but not limited to, claims of wrongful termination, constructive discharge, defamation, invasion of privacy, interference with contract, interference with prospective economic advantage, and intentional or negligent infliction of emotional distress and outrage;

(v) any and all contract claims whether express or implied;

(vi) any and all claims for unpaid benefits or entitlements asserted under any Bank plan, policy, benefits offering or program except any vested retirement or pension benefits, if any, or as otherwise required by law or preserved in this Agreement; and

(vii) any and all claims for attorneys’ fees, interest, costs, injunctive relief or reinstatement to which Ms. Bowers is, claims to be or may be, entitled.

Nothing in this Agreement shall limit Ms. Bowers’ ability to participate in any investigation by, or to file a complaint or charge of discrimination with any federal or state administrative agency. Ms. Bowers agrees, however, that by signing this Agreement she expressly waives any right she may have to recover money damages in a suit brought by any state or federal governmental agency on her behalf. It is understood and agreed that this release does not apply to claims for breach of this Agreement, claims related to vested employee benefits, claims for unemployment compensation benefits, claims for workers’ compensation benefits or any other claims that are not waivable by law.

8. Agreement Not to Sue . In consideration of the Bank’s promises, payments and other consideration contained herein, Ms. Bowers hereby further agrees that if any claim referenced herein is filed, pursued, or otherwise prosecuted by Ms. Bowers, individually or collectively, or by any persons or entities, by or through her or on her behalf, individually or collectively, Ms. Bowers waives her rights to relief from such claim, including the right to attorneys’ fees, costs and any and all other relief whether legal or equitable, sought in such claim, and agrees to indemnify and hold Releasees harmless from such claim, including attorneys’ fees and costs. If Ms. Bowers violates this Agreement by suing the Bank or the Releasees, Ms. Bowers agrees that she will pay all costs and expenses of defending against the suit incurred by the Bank or the Releasees. Nothing in this Section 8 will prevent Ms. Bowers from bringing claims against the Bank arising out of a breach of this Agreement.

9. Absence of Claims . Ms. Bowers also acknowledges, represents and warrants that she has not filed or assigned to any person or entity any claims, charges, complaints, or grievances against the Bank.

10. Business Expenses . Any outstanding business expenses incurred through the Separation Date for which Ms. Bowers may be seeking reimbursement shall be submitted by Ms. Bowers to Jan Carlson, HR Manager, on or before May 31, 2019. Provided Ms. Bowers complies with this Section 10 and the expenses submitted for reimbursement are reasonable, the Bank will process the expense check according to established business practices within thirty (30) days of receipt.

11. Return of Property. Ms. Bowers further acknowledges and agrees on the Separation Date that she shall return to the Bank, or its appropriate related and/or subsidiary companies, any and all Bank property, including but not limited to, keys/fobs to the Bank’s properties, passwords, electronic passwords, documents, handbooks, policies and procedures, client lists, personnel ID’s, all written or electronically recorded materials that Ms. Bowers has in her possession or control concerning information that relates to the business of the Bank, including without limitation, all financial information, budgets, projections, personnel information, insurance records, information relating to any lawsuits, customer information, and all summaries, extracts and notes relating thereto. In addition, Ms. Bowers agrees that neither she nor her attorneys or other agents will keep any originals or copies of the foregoing retained or acquired by Ms. Bowers during or following Ms. Bowers’ employment with the Bank. Ms. Bowers further acknowledges that she will not destroy any information in her custody or possession relating to or belonging to the Bank.

12. Non-Disparagement . In consideration of the Bank’s promises, payments and other consideration contained herein, Ms. Bowers further agrees she will not do or say anything that would have the effect of diminishing or damaging the goodwill and good reputation of the Bank, its related or subsidiary companies, officers, directors, employees or the Bank’s products and services.

13. Cooperation. In consideration of the Bank’s promises, payments and other consideration contained herein, Ms. Bowers agrees to cooperate fully and assist the Bank in connection with any current or subsequent legal, administrative or regulatory matter or other proceedings involving the Bank.

14. Advice to Seek Counsel/Time to Consider. Ms. Bowers further acknowledges that the Bank has advised Ms. Bowers that she may consult an attorney of Ms. Bowers’ choosing, at her own expense to consider the terms of this Severance Agreement.

15. No Admission of Wrongdoing . It is understood and agreed that this Agreement does not and shall not constitute an admission by the Bank or Ms. Bowers that it or she has violated any law or any right of the other.

16. Confidentiality . In consideration of the Bank’s promises, payments and other consideration contained herein, Ms. Bowers agrees to hold this Agreement and its terms in confidence and not to disclose or discuss the existence of this Agreement or its contents with anyone, including employees of the Bank and its affiliates, except her attorney/s and immediate family members.

17. Severability/Enforcement. Should this Agreement be held invalid or unenforceable, (in whole or in part), with respect to any particular claims or circumstances, it shall remain fully valid and enforceable as to all other claims and circumstances.

18. Applicable Law. This Agreement shall be construed in accordance with the laws of the State of Tennessee, and its terms shall in all cases be interpreted as a whole, according to its fair meaning, and not strictly for or against either of the Bank or Ms. Bowers.

19. Whole Agreement. The Parties further agree that this Severance Agreement sets forth the entire agreement between the Parties hereto and fully supersedes any and all prior agreements or understandings between them which have not been fully incorporated by reference into this document. This Agreement may be amended or superseded only by a subsequent writing executed by all Parties.

20. Knowing and Voluntary Agreement. The Parties represent and certify that they have carefully read and fully understand all of the provisions of this Agreement, that they have had ample and adequate opportunity to thoroughly discuss all aspects of this Agreement with legal counsel of their own choosing, that they are voluntarily entering into this Agreement and that no representations have been made other than those set forth explicitly herein.

21. Internal Revenue Code Section 409A . The Bank intends that if any payments and benefits are provided under this Severance Agreement they shall either be exempt from the application of, or comply with, the requirements of Code Section 409A. The Severance Agreement shall be construed in a manner that supports the Bank’s intent to be exempt from or comply with Code Section 409A. Notwithstanding anything in the Agreement to the contrary, the Bank may amend the Severance Agreement, to take effect retroactively or otherwise, as deemed necessary or advisable for the purpose of remaining exempt from or complying with the requirements of Code Section 409A, provided however that any such amendment will not otherwise modify the material financial terms of this Severance Agreement. Whenever payments under this Agreement are to be made in installments, each such installment shall be deemed to be a separate payment for purposes of Code Section 409A. Further, (a) in the event that Code Section 409A requires that any special terms, provisions or conditions be included in this Severance Agreement, then such terms, provisions and conditions shall, to the extent practicable, be deemed to be made a part of this Severance Agreement, and (b) terms used in this Severance Agreement shall be construed in accordance with Code Section 409A if and to the

extent required. Further, in the event that this Agreement or any benefit thereunder shall be deemed not to comply with Code Section 409A, then neither the Bank , its Board, its officers, its employees, any of the Bank ’ s committees nor its or their designees or agents shall be liable to Ms. Bowers or other persons for actions, decisions or determinations made in good faith. If this provision prevents the payment or distribution of any n on- e xempt d eferred c ompensation, such payment or distribution shall be made on the date, if any, on which an event occurs that constitutes a Code Section 409A-compliant “ separation from service. ” Finally, neither the Bank nor Ms. Bowers shall accelerate the timing of any payment to be made under this Severance Agreement , and neither may defer any payment to a future date, except a s may be expressly permitted by regulations issued under IRS Code Section 409A.

22. Jury Trial Waiver . The Parties hereto respectively waive their rights to a trial by jury with regard to any matter addressed in or arising out of this Agreement.

23. Venue . The Parties hereto agree that the exclusive venue for any litigation arising under or out of this Agreement shall be in any state court located in Williamson County, Tennessee.

(Signature page follows)

I UNDERSTAND AND AGREE THAT THIS SEVERANCE AGREEMENT CONSTITUTES A FULL AND FINAL RELEASE OF ALL CLAIMS, INCLUDING KNOWN AND UNKNOWN CLAIMS, WHICH I MIGHT HAVE AS OF THIS DATE.


/s/ Sally Bowers
SALLY E. BOWERS
Date:	May 7, 2019
FRANKLIN SYNERGY BANK
By:	/s/ J. Myers Jones, III
J. MYERS JONES, III
Title:	Interim Chief Executive Officer
Date:	May 7, 2019

Exhibit 10.4

COMMENCEMENT DATE AGREEMENT

An Agreement made this 3rd day of December, 2018, by and between SS McEwen, LLC (hereinafter called "Landlord"), and Franklin Synergy Bank (hereinafter called "Tenant").

WITNESSETH:

WHEREAS, on July 25, 2017 Landlord and Tenant entered into a Lease ("Lease") relating to certain Premises located at Carothers Crossing East Shopping Center and

WHEREAS, the term of the Lease has commenced, pursuant to the Lease Summary; and

WHEREAS, the parties desire to confirm the dates of commencement, rent schedule and expiration of the term;

NOW, THEREFORE, in consideration of the mutual covenants herein contained, Landlord a nd Tenant agree as follows:

(1) The term of the Lease shall commence on December 1, 2018.

(2) Tenant’s rental obligations under the Lease shall commence on December 1, 2018.

Rent Schedule shall be as follows:


	Minimum Monthly	Minimum Annually
12/1/2018 -11/30/2019	$12.600.00	$151,200.00
12/1/2019 -11/30/2020	$12,852.00	$154,224.00
12/1/2020 - 11/30/2021	$13,109.04	$157,308.48
12/1/2021 -11/30/2022	$13,371.22	$160,454.65
12/1/2022 -11/30/2023	$13,638.65	$163,663.74
12/1/2023 -11/30/2024	$13,911.42	$166,937.02
12/1/2024 -11/30/2025	$14,189.65	$170,275.76
12/1/2025 -11/30/2026	$14,473.44	$173,681.27
12/1/2026 -11/30/2027	$14,762.91	$177,154.90
12/1/2027 -11/30/2028	$15,058.17	$180,698.00

(3) The initial term of the Lease shall expire on November 30, 2028.

(4) The Lease is in full force and effect and i s hereby ratified and confirmed.

IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be duly executed on the date first written above.


TENANT:		LANDLORD:
FRANKLIN SYNERGY BANK		SS MCEWEN, LLC

By: /s/ Sarah Meyerrose		By: /s/ Glen R. Wilson, Manager

Title: EVP / CFO

Date: 12/3/2018		Date: 12/3/2018

Exhibit 10.5

EXHIBIT B

Form of Commencement Agreement

COMMENCEMENT AGREEMENT

THIS COMMENCEMENT AGREEMENT (this “Agreement”), made and entered into as of this 29th day of November, 2018, is by and between SOUTH ROYAL OAKS PARTNERS, LLC , a Tennessee limited liability company, (“Landlord”), and FRANKLIN SYNERGY BANK , a Tennessee banking corporation (“Tenant”).

A. Tenant and Landlord entered into that certain Triple Net Office Lease Agreement dated August 28, 2018 (the “Lease”), for certain improved real property municipally known as 231 South Royal Oaks Blvd located in Franklin, Williamson County, Tennessee, consisting of approximately 10,868 rentable square feet, being more particularly described in the Lease; and

B. The parties desire to precisely establish the Commencement Date as set forth below.

1. The term of the Lease by and between Landlord and Tenant shall commence on January 1, 2019 (the “Commencement Date”).

2. Except as modified and amended by this Agreement, the Lease shall remain in full force and effect.

IN WITNESS WHEREOF , Landlord and Tenant have caused this Agreement to be duly executed, as of the day and year first above written.


LANDLORD:		TENANT:

SOUTH ROYAL OAKS PARTNERS, LLC		FRANKLIN SYNERGY BANK


By:	/s/ Henry W. Brockman, Jr.	By:	/s/ Sarah Meyerrose

Title:	Managing Partner and President	Title:	EVP/CFO

Exhibit 10.6

EXHIBIT B

Form of Commencement Agreement

COMMENCEMENT AGREEMENT

THIS COMMENCEMENT AGREEMENT (this “Agreement”), made and entered into as of this 14 ^th day of February, 2019, is by and between 204 9TH AVENUE PARTNERS, LLC , a Tennessee limited liability company, (“Landlord”), and FRANKLIN SYNERGY BANK , a Tennessee banking corporation (“Tenant”).

A. Tenant and Landlord entered into that certain Triple Net Office Lease Agreement dated _February 8, 2018 (the “Lease”), for certain improved real property municipally known as 204 9th Avenue located in Franklin, Williamson County, Tennessee, consisting of approximately 8,888 rentable square feet, being more particularly described in the Lease; and

B. The parties desire to precisely establish the Commencement Date as set forth below.

1. The term of the Lease by and between Landlord and Tenant actually commenced on _February 22, 2019 (the “Commencement Date”).

2. Except as modified and amended by this Agreement, the Lease shall remain in full force and effect.

IN WITNESS WHEREOF , Landlord and Tenant have caused this Agreement to be duly executed, as of the day and year first above written.


LANDLORD:		TENANT:

204 9TH AVENUE PARTNERS, LLC		FRANKLIN SYNERGY BANK


By:	/s/ Henry W Brockman, Jr.	By:	/s/ Christopher J. Black

Title:	President and Managing Partner	Title:	Executive Vice President and Chief Financial Officer

Exhibit 31.1

CERTIFICATION

I, J. Myers Jones, III, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Franklin Financial Network, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2019

By:

/s/ J. Myers Jones, III

J. Myers Jones, III

Interim Chief Executive Officer

Franklin Financial Network, Inc.

Exhibit 31.2

CERTIFICATION

I, Christopher J. Black, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Franklin Financial Network, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2019

By:

/s/ Christopher J. Black

Christopher J. Black

Executive Vice President and

Chief Financial Officer

Franklin Financial Network, Inc.

Exhibit 32

CERTIFICATION PURSUANT TO RULE 13a-14(b) UNDER

THE SECURITIES EXCHANGE ACT OF 1934 AND

SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE

Each of the undersigned, J. Myers Jones, III, the Interim Chief Executive Officer of Franklin Financial Network, Inc. (the “Company”), and Christopher J. Black, Executive Vice President and Chief Financial Officer of the Company, certifies, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, that (1) this Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and (2) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification is signed on May 9, 2019.


By:		/s/ J. Myers Jones, III
		J. Myers Jones, III
		Interim Chief Executive Officer Franklin Financial Network, Inc.


By:		/s/ Christopher J. Black
		Christopher J. Black
		Executive Vice President and Chief Financial Officer Franklin Financial Network, Inc.