Franklin Financial Hit with Reg Order Tied to CRE

Franklin Financial Network in Nashville, Tenn., is raising capital after being flagged by regulators for its exposure to commercial real estate.

The $2.7 million-asset company, which recently disclosed plans to raise $62 million, disclosed in the offering’s prospectus that it entered into a memorandum of understanding with regulators on Nov. 3.

The order, reached with the Federal Reserve and the Tennessee Department of Financial Institutions, requires Franklin’s bank to improve its underwriting, internal controls, risk management policies and portfolio stress testing, largely as a result of its commercial real estate growth and exposure. About 55% of the bank’s loans at Sept. 30 consisted of CRE, while construction and development loans make up nearly 29% of the entire loan book, the prospectus said.

Franklin said its ability to close acquisitions, including its pending purchase of Civic Bank & Trust in Nashville, will "be limited." The company will also need to secure regulatory approval before paying dividends. The order also requires the bank to enhance its capital and liquidity plans.

Franklin Synergy also said it could be required to reassess is loan-loss allowances and capital levels due to its CRE exposure.

"While we believe we have appropriate systems in place to underwrite and monitor the risks associated with [construction and development] loans, if these systems do not adequately protect us from these risks, we could incur losses that exceed our reserves for such losses, which could adversely impact our earnings," the company said.

The company also disclosed that it expects to reach a separate agreement with the Fed to address its risk profile and to strengthen its underlying condition.