<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
COMMISSION FILE NUMBER: 0-23469
FRANKLIN FINANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-3372606
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
24725 WEST TWELVE MILE ROAD
SOUTHFIELD, MICHIGAN 48034
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(248) 358-4710
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
EQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S SOLE CLASS OF COMMON STOCK
IS 22,077 SHARES, $300 PAR VALUE, AS OF JUNE 30, 1999.
<PAGE> 2
FRANKLIN FINANCE CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS: PAGE
STATEMENTS OF FINANCIAL CONDITION AT JUNE 30, 1999
AND DECEMBER 31, 1998............................................1
STATEMENT OF OPERATIONS FOR THE SIX MONTHS AND THREE MONTHS
ENDED JUNE 30, 1999 AND JUNE 30, 1998............................2
STATEMENT OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS
ENDED JUNE 30, 1999 .............................................3
STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND JUNE 30, 1998................................................4
NOTES TO FINANCIAL STATEMENTS......................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTH PERIODS
ENDED JUNE 30, 1999 AND JUNE 30, 1998...........................6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK ........................................................10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ..............................................10
ITEM 2. CHANGES IN SECURITIES...........................................10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............10
ITEM 5. OTHER INFORMATION...............................................10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...............................10
SIGNATURES...............................................................11
ii
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FRANKLIN FINANCE CORPORATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------------------
ASSETS (unaudited)
<S> <C> <C>
Cash $ 1,679,150 $ 106,546
Loans
Residential mortgage loans 12,110,557 13,799,073
Commercial mortgage loans 10,419,295 11,246,854
Allowance for loan losses (12,000) (12,000)
- --------------------------------------------------------------------------------------------------------
Net loans 22,517,852 25,033,927
Mortgage-backed securities, available for sale 17,684,446 15,028,748
Accrued interest - mortgage-backed securities 185,516 181,089
Accrued interest - residential loans 54,147 67,278
Accrued interest - commercial loans 57,552 79,689
Due from parent company 2,039,668
Prepaid expenses and other assets 87,049 22,930
- --------------------------------------------------------------------------------------------------------
Total assets $ 42,265,711 $ 42,559,875
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to Franklin $ 388,216
Dividend payable - Common $ 962,105
Miscellaneous accounts payable 10,000
- --------------------------------------------------------------------------------------------------------
Total current liabilities $ 398,216 $ 962,105
Shareholders' equity
Common Stock par value $300.00; 60,000 shares
authorized, 22,077 shares issued and outstanding $ 6,623,100 $ 6,623,100
Preferred Stock, liquidation preference $10.00; 2,500,000 shares
authorized, 2,070,000 shares issued and outstanding 20,700,000 20,700,000
Paid in surplus 14,319,178 14,319,178
Accumulated other comprehensive loss (54,695) (44,508)
Retained earnings 279,912
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 41,867,495 41,597,770
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 42,265,711 $ 42,559,875
========================================================================================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
1
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FRANKLIN FINANCE CORPORATION
STATEMENT OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
-----------------------------------------------------------
June 30, June 30,
1999 1998 1999 1998
-----------------------------------------------------------
Interest Income
<S> <C> <C> <C> <C>
Interest on residential loans $ 467,878 $ 816,516 $ 220,043 $ 383,091
Interest on commercial loans 495,481 751,483 238,645 356,774
Interest on mortgage-backed securities 352,540 166,843
- -------------------------------------------------------------------------------------------------------------------------
Total interest on loans and securities 1,315,899 1,567,999 625,531 739,865
Provision for loan losses 12,000
- -------------------------------------------------------------------------------------------------------------------------
Total interest income after provision for loan losses $1,315,899 $1,555,999 $ 625,531 $ 739,865
- -------------------------------------------------------------------------------------------------------------------------
Expenses
Director's fees 2,000 1,000
Outside services 2,675 4,803 1,524 4,044
Audit expense 13,000 3,000
Advisory fee 62,544 62,544 31,272 31,272
Insurance 11,330 15,391 5,667 7,692
Loan service fee 37,988 64,924 12,317 35,138
Single business tax 6,000 6,000
- -------------------------------------------------------------------------------------------------------------------------
Total expenses 135,537 148,662 59,780 78,146
- -------------------------------------------------------------------------------------------------------------------------
Net income 1,180,362 1,407,337 565,751 661,719
- -------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend 900,450 900,997 450,225 450,225
- -------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 279,912 $ 506,340 $ 115,526 $ 211,494
=========================================================================================================================
Earnings per common share - basic 12.68 22.94 5.23 9.58
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
2
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FRANKLIN FINANCE CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Preferred Common Paid in Gain/(Loss) Retained
Stock Stock Surplus on Securities Earnings Totals
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock $6,623,100 $14,319,178 20,942,278
Initial public offering of 8.70%
Noncumulative Preferred Stock, Series A
on December 22, 1997 $20,700,000 20,700,000
Net Income $ 102,547 102,547
Dividends on 8.70% Noncumulative
Series A Preferred Shares (49,340) (49,340)
Dividends on Common Stock ($2.41 per share) (53,207) (53,207)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 20,700,000 6,623,100 14,319,178 41,642,278
Net Income 2,763,552 2,763,552
Capital Contribution from
Common Shareholder 67,552 67,552
Additional Expenses for Preferred
Stock Offering (67,552) (67,552)
Dividends on 8.70% Noncumulative
Series A Preferred Shares (1,801,447) (1,801,447)
Dividend on Common Stock ($43.58 per share) (962,105) (962,105)
Change in accumulated other
comprehensive loss $(44,508) (44,508)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $20,700,000 $6,623,100 $14,319,178 $(44,508) 41,597,770
Net Income $ 1,180,362 1,180,362
Capital Contribution from
Common Shareholder
Additional Expenses for Preferred
Stock Offering
Dividends on 8.70% Noncumulative
Series A Preferred Shares (900,450) (900,450)
Change in accumulated
comprehensive loss (10,187) (10,187)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $20,700,000 $6,623,100 $14,319,178 $(54,695) $ 279,912 41,867,495
===================================================================================================================================
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
3
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FRANKLIN FINANCE CORPORATION
STATEMENT OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30,
1999 1998
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 279,912 $ 506,339
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses -- 12,000
Amortization on securities (31,038) (117,431)
(Increase)decrease in accrued interest receivable 30,841 (23,512)
(Increase)decrease in prepaid expenses and other assets 1,907,511 (133,160)
Decrease(increase) in other liabilities (490,603) (102,547)
------------------------------
Total adjustments 1,416,711 (364,650)
------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,696,623 141,689
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale (4,934,840) (4,464,381)
Proceeds from maturities and paydowns of securities available for sale 2,294,746
Purchase of residential loans (998,332)
Purchase of commercial loans (2,908,412) (981,840)
Net (increase)decrease in loans 6,422,819 7,894,657
------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES (124,019) 2,448,436
------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,572,604 2,590,125
------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 106,546 268
------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,679,150 $ 2,590,393
==============================
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
4
<PAGE> 7
FRANKLIN FINANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Franklin Finance Corporation (the "Company") is a Michigan corporation which was
incorporated on September 25, 1997 and created for the purpose of acquiring and
holding real estate mortgage assets. The Company is a wholly-owned subsidiary of
Franklin Bank, N.A. (the "Bank"), a nationally chartered commercial bank.
On September 25, 1997, the Company was initially capitalized with the issuance
to the Bank of 1,000 shares of the Company's common stock (the "Common Stock"),
$1.00 par value. On December 22, 1997, the Company commenced its operations upon
consummation of an initial public offering of 2,070,000 shares of the Company's
8.70% Noncumulative Preferred Stock, Series A (the "Series A Preferred Shares"),
$10.00 liquidation preference. These offerings, together with a separate capital
contribution of $20.9 million made by the Bank on December 22, 1997, raised net
capital of approximately $41.6 million.
The Company used the proceeds raised from the initial public offering of the
Series A Preferred Shares, the sale of Common Stock to the Bank and the
additional capital contribution to the Company by the Bank to pay the expenses
related to the offering and the formation of the Company and to purchase from
the Bank the Company's initial portfolio of residential and commercial mortgage
loans at their estimated fair value of approximately $41.5 million. Such loans
were recorded in the accompanying balance sheet at their estimated fair values.
NOTE 2 - RESIDENTIAL AND COMMERICAL MORTGAGE LOANS:
Of the residential mortgage loans included in the portfolio, 49.5% and 48.3%
bear interest at fixed rates at June 30, 1999 and 1998, respectively. At June
30, 1999, the interest rates of the fixed rate residential mortgage loans
included in the portfolio range from 6.00% per annum to 10.00% per annum. At
June 30, 1998 these rates ranged from 6.00% to 10.25%. The weighted average
interest rate of the fixed rate residential mortgage loans included in the
portfolio at June 30, 1999 and 1998, respectively, was approximately 7.57% and
8.25% per annum.
Of the residential mortgage loans included in the portfolio, 50.5% and 51.7%
bear interest at adjustable rates at June 30, 1999 and 1998, respectively. The
interest rates on the "adjustable rate mortgages" or "ARMs" contained in the
portfolio are all tied to the one-year Treasury Index ("One-Year ARM"), and
adjust periodically. The interest rates of the residential mortgage loans
included in the portfolio that are ARMs ranged from 5.50% per annum to 8.375%
per annum as of June 30, 1999. At June 30, 1998 these rates ranged from 6.875%
to 8.75%. As of June 30, 1999 and 1998, respectively, the weighted average
current interest rate of the residential mortgage loans included in the
portfolio that are ARMs was approximately 7.19% and 7.87% per annum.
The commercial mortgage loans included in the portfolio generally consist of
retail strip centers, multi-family residential rental properties, warehouse,
industrial and office center properties located in Michigan. The outstanding
principal balances of the commercial mortgage loans included in the portfolio
ranged from $132,818 to $1.9 million as of June 30, 1999, and $140,670 to $1.9
million as of June 30, 1998.
Of the commercial mortgage loans included in the portfolio at June 30, 1999 and
1998, respectively, 78.9% and 59.7% bear interest at fixed rates. The interest
rates of the fixed rate commercial mortgage loans included in the portfolio
ranged from 7.75% per annum to 9.75% per annum at June 30, 1999, and 7.75% to
12.00 % per annum at June 30, 1998. The weighted average current interest rate
of the commercial mortgage loans included in the portfolio that are fixed rate
loans was 7.71% and 9.89% per annum as of June 30, 1999 and 1998, respectively.
5
<PAGE> 8
NOTE 3 - FEDERAL HOME LOAN MORTGAGE CORPORATION, ("FHLMC") MORTGAGE BACKED
SECURITIES AND FEDERAL NATIONAL MORTGAGE ASSOCIATION, ("FNMA') MORTGAGE BACKED
SECURITIES
At June 30, 1999 and 1998, the mortage-backed securities held by the Company
totaled $17.7 and $4.6 million, respectively. These securities had a weighted
average yield of 7.31% and a weighted average term to maturity of 2.78 years at
June 30, 1999. At June 30, 1998, these securities had a weighted average life of
1.44 years and yielded a weighted average yield to maturity of 6.33%.
NOTE 4 - PREFERRED STOCK
On December 22, 1997, the Company sold $20.7 million of Series A Preferred
Shares, $10.00 par value and received net cash proceeds of $19.8 million. Cash
dividends on the Series A Preferred Shares are payable quarterly in arrears at
an annual rate of 8.70%. The liquidation value of each Series A Preferred Share
is $10.00 plus accrued and unpaid dividends for the most recent quarter thereon,
if any, to the date of liquidation. The Series A Preferred Shares are not
redeemable until December 22, 2002, and are redeemable thereafter at the option
of the Company. Except under certain circumstances, the holders of the Series A
Preferred Shares have no voting rights. The Series A Preferred Shares are
automatically exchangeable for a new series of preferred stock of the Bank upon
the occurrence of certain events.
NOTE 5 - DIVIDENDS:
During the six months ended June 30, 1999 and 1998, respectively, the Company's
Board of Directors declared $900,450 and $950,337 of preferred stock dividends.
To comply with current IRS regulations, it is expected that common dividends
will be declared in the fourth quarter of 1999.
PART I
ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the matters discussed in
this Report may be deemed to be forward-looking statements that involve risk and
uncertainties. Words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Factors which could cause
actual results to differ include, but are not limited to, fluctuations in
interest rates, changes in economic conditions in the Bank's market area,
changes in policies by regulatory agencies, the acceptance of new products, the
impact of competitive products and pricing, and the other risks detailed from
time to time in the Company's SEC reports. These forward-looking statements
represent the Bank's judgement as of the date of this report. The Bank
disclaims, however, any intent or obligation to update these forward-looking
statements.
FINANCIAL CONDITION
Organization
Franklin Finance Corporation (the "Company") is a Michigan corporation
incorporated on September 25, 1997, and created for the purpose of acquiring and
holding real estate mortgage assets ("Mortgage Assets"). The Company elected to
be treated as a real estate investment trust (a "REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"), and generally will not be subject
to Federal income tax to the extent that it distributes its earnings to its
stockholders and maintains its qualification as a REIT. All of the shares of the
Company's common stock, par value $300.00 per share (the "Common Stock"), are
owned by Franklin Bank, N.A., a nationally chartered and federally insured
national bank (the "Bank"). The Company was formed by the Bank to provide the
Bank with a cost- effective means of raising capital.
On December 22, 1997, the Company commenced its operations upon the closing of
the initial public offering (the "Offering") of 2,070,000 shares of the
Company's 8.70% Noncumulative Exchangeable Preferred Stock, Series A, par value
$10.00 per share (the "Series A Preferred Shares"). The net proceeds to the
Company from the sale of the Series A Preferred Shares were $19.8 million.
Simultaneous with the consummation of the Offering, the Bank made
6
<PAGE> 9
capital contributions to the Company with respect to its Common Stock in the
amount of $20.7 million, plus an additional $1.1 million representing the
underwriting discount and the expenses of the Offering.
The Company used the net proceeds of $42.9 million raised from the Offering and
the capital contributions by the Bank to purchase from the Bank the Company's
initial portfolio of Mortgage Assets, comprised of residential and commercial
mortgage loans ("Mortgage Loans"), at their estimated fair value of
approximately $41.5 million. Such loans were recorded in the accompanying
financial statements at the Bank's historical cost basis of $41.2 million and
the premium paid with the purchase of the loans of $0.3 million.
The Bank administers the day-to-day activities of the Company in its role as
advisor under an Advisory Agreement. The Bank also services the Company's
Mortgage Assets pursuant to servicing agreements between the Company and the
Bank. These assets represent residential loans, commercial mortgage loans,
Federal Home Loan mortgage backed securities, and FNMA agency debt securities.
At June 30, 1999 and December 31, 1998, respectively, the Company had $12.2 and
$13.8 million invested in loans secured by first mortgages or deeds of trust on
single-family residential real estate properties ("Residential Mortgage Loans").
The $1.7 million net decrease from the balance at December 31, 1998, resulted
from Residential Mortgage Loan principal collections and individual loan payoffs
of $2.7 million and the purchase of loans for the portfolio of $1.0 million.
Management intends to continue to reinvest proceeds received from repayments of
loans into additional Residential Mortgage Loans or residential mortgage backed
securities to be purchased from either the Bank or its affiliates. See "Results
of Operations."
At June 30, 1999 and December 31, 1998, respectively, the Company had $10.4 and
$11.2 million invested in mortgage loans secured by income-producing properties
("Commerical Mortgage Loans") that consist of retail strip centers, multi-family
residential rental properties, warehouse, industrial and office center
properties located in Michigan. The $900,000 net decrease from the balance at
December 31, 1998, resulted from Commercial Mortgage Loan principal collections
and individual loan payoffs of $3.8 million and the purchase of loans for the
portfolio of $2.9 million. Management intends to continue to reinvest proceeds
received from repayments of loans in additional Commerical Mortgage Loans, or
mortgage backed securities to be purchased from either the Bank or its
affiliates. See "Results of Operations."
At June 30, 1999 and December 31, 1998, the Company had outstanding principal
balances of $17.7 and $15.0 million, respectively, invested in "FHLMC" mortgage
backed notes and "FNMA" agency securities. These loans are for single family
residential loans.
At June 30, 1999 and December 31, 1998, respectively, the Company had no
non-accrual loans (loans contractually past due 90 days or more or with respect
to which other factors indicate that full payment of principal and interest is
unlikely).
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
amount and composition of the loan portfolio, and other factors. The allowance
is increased by provisions for loan losses charged to income and reduced by net
charge-offs. The activity in the allowance for loan losses for the six months
ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
June 30,
1999 1998
------------------------------
<S> <C> <C>
Balance at beginning of period $ 12,000 $ -
Provision for loan losses 12,000
Charge-offs
Recoveries
------------------------------
Balance at end of period $ 12,000 $ 12,000
------------------------------
</TABLE>
7
<PAGE> 10
Interest Rate Risk
The Company's income consists primarily of interest payments on mortgage loans
and mortgage-backed securities. If there is a decline in interest rates (as
measured by the indices upon which the interest rates of the adjustable rate
mortgage loans are based), then the Company will experience a decrease in income
available to be distributed to its shareholders. Conversely, an increase in
interest rates would cause the Company to experience an increase in interest
income. There can be no assurance that an interest rate environment in which
there is a significant decline in interest rates, over an extended period of
time, would not adversely affect the Company's ability to pay dividends on the
Series A Preferred Shares. Currently, the Company does not use any derivative
products to manage its interest rate risk.
Significant Concentration of Credit Risk
Concentration of credit risk arises when a number of customers engage in similar
business activities, or activities in the same geographical region, or have
similar economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions.
Concentration of credit risk indicates the relative sensitivity of the Company's
performance to both positive and negative developments affecting a particular
industry.
Geographically, the Company's Mortgage Loans generally will be concentrated in
the State of Michigan. Geographic concentration of loans may present risks in
addition to those present with respect to mortgage loans generally. All of the
properties underlying the Company's Residential and Commercial Mortgage Loans
included in the current portfolio are located in Michigan. Mortgage Loans
secured by properties located in Michigan may be subject to a greater risk of
default than other comparable mortgage loans in the event of adverse economic,
political or business developments or natural hazards that may affect Michigan
and the ability of borrowers in Michigan to make payments of principal and
interest on such loans. The investments held in the FHLMC and FNMA agency
securities help to offset some of the geographic concentration risk in that the
residential mortgage loans collateralizing the securities are representative of
many geographic areas.
Liquidity and Capital Resources
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments. In
managing liquidity, the Company takes into account various legal limitations
placed on a REIT as discussed below in "Tax Status of the Company."
The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional mortgage loans as Mortgage Loans
currently in the portfolio mature or prepay, and to pay dividends on the Series
A Preferred Shares. The acquisition of additional mortgage loans is intended to
be funded with the proceeds obtained from repayment of principal balances by the
individual mortgagees. The Company does not have and does not anticipate having
any material capital expenditures.
To the extent that the Board of Directors determines that additional funding is
required, the Company may raise such funds through additional equity offerings,
debt financing or retention of cash flows (after consideration of provisions of
the Code requiring the distribution by a REIT of at least 95% of its "REIT
taxable income" and taking into account taxes that would be imposed on
undistributed income), or a combination of these methods, subject to certain
approvals as described in the Company's organizational documents.
Tax Status of the Company
The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Code, commencing with its taxable year ended December 31, 1998. As a REIT,
the Company generally will not be subject to Federal income tax on its net
income (excluding capital gains) provided that it distributes annually 95
percent of its REIT taxable income to its stockholders, and meets certain
organizational, stock ownership and operational requirements. If in any taxable
year the Company fails to qualify as a REIT, the Company would not be allowed a
deduction for distributions to stockholders in computing its taxable income and
would be subject to Federal and state income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. In
addition, the Company would also be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As of June 30, 1999, the Company believed that it was in compliance with the
REIT tax rules and that it will continue to qualify as a REIT under the
provisions of the Code.
8
<PAGE> 11
RESULTS OF OPERATIONS
Comparison of Six Months Ended June 30, 1999 to Six Months Ended June 30, 1998
During the six-month period ended June 30, 1999 and June 30, 1998 (the
"six-month period"), the Company reported net income of $279,912 and $506,340,
respectively. Interest income on Residential Mortgage Loans has declined and
totaled $467,878 and $816,516 for the six-month periods, respectively, which
represents an average yield on such loans of 7.32% and 7.89%, respectively.
Interest income on Commercial Mortgage Loans has also declined and totaled
$495,481 and $751,483 for the six-month periods, respectively, which represents
an average yield on such loans of 8.16 % and 8.68%, respectively. The decline in
interest revenue is reflected in both the decline in the average outstanding
loan balances and the average yield earned in the residential and commercial
loan portfolio. The average loan balance of the Residential Mortgage Loan
portfolio for the six-month periods was $12.1 million and $20.7 million,
respectively. The average balance of the Commercial Mortgage Loan portfolio for
the six-month periods was $11.1 million and $17.3 million, respectively.
Interest income earned on the mortgage-backed investment securities for the
six-month period ended June 30, 1999 totaled $352,540. There was no interest
income on mortgage-backed securities for the six-month period ended June 30,
1998. The June 30, 1999 six-month average yield was 7.31% on an average balance
of $14.5 million. The interest increase in the mortgage-backed securities helped
to offset the decrease in the interest income for the residential and commercial
mortgage portfolios. However, the average decrease in the yield earned on all
portfolios has resulted in a decline in the interest income for the period ended
June 30, 1999 compared to June 30, 1998 of $240,100.
Provision for loan losses of $12,000 was recorded on the Company's loan
portfolio during the six-month period ending June 30, 1998. No additional
provisions were made for the period ended June 30, 1999.
Operating expenses totaling $135,537 and $148,662 for the six-month periods,
respectively, were comprised of loan servicing fees and advisory fees paid to
the Bank, directors fees, and general and administrative expenses. Loan
servicing fees paid to the Bank of $37,988 and $64,924 for the six-month
periods, respectively, were based on a servicing fee rate of .375% of the
outstanding principal balances of the Residential and Commerical Mortgage Loans,
pursuant to the servicing agreements between the Company and the Bank. They have
decreased with the reduction in the corresponding balances of the loan
portfolios which the Bank is servicing for the Company. Administrative expenses
consist primarily of insurance and outside audit expenses.
Franklin Finance Corporation is linked with Franklin Bank's year 2000 compliance
efforts because Franklin Finance Corporation is a wholly owned subsidiary of
Franklin Bank. Please refer to Franklin Bank's June 30, 1999, Form 10-Q for a
description of Year 2000 compliance status.
Comparison of Three Months Ended June 30, 1999 to Three Months Ended June 30,
1998
During the three-month period ended June 30, 1999 and June 30, 1998 (the
"three-month period"), the Company reported net income of $115,526 and $211,494,
respectively. Interest income on Residential Mortgage Loans totaled $220,043 and
$383,091 for the three-month periods, respectively, which represents an average
yield on such loans of 7.58% and 7.70%, respectively. Interest income on
Commercial Mortgage Loans totaled $238,645 and $356,774 for the three-month
periods, respectively, which represents an average yield on such loans of 8.16 %
and 8.55%, respectively. The average loan balance of the Residential Mortgage
Loan portfolio for the three-month periods was $11.6 million and $19.9 million,
respectively. The average balance of the Commercial Mortgage Loan portfolio for
the three-month periods was $10.5 million and $16.7 million, respectively. See
"Comparison of six months ended June 30, 1999 to six months ended June 30, 1998"
for further discussion of interest income earned on residential and commercial
nortgage loans.
Interest income earned on the mortgage-backed investment securities for
three-month period ended June 30, 1999 totaled $166,843. There was no interest
income on mortgage-backed securities for the three-month period ended June 30,
1998. The three-month average yield for June 30, 1999 was 7.31% on an average
balance of $14.7 million. See "Comparison of six months ended June 30, 1999 to
six months ended June 30, 1998" for further discussion of interest income earned
on mortgage-backed securities.
9
<PAGE> 12
Operating expenses totaling $59,780 and $78,146 for the three-month periods,
respectively, were comprised of loan servicing fees and advisory fees paid to
the Bank, directors fees, and general and administrative expenses. Loan
servicing fees paid to the Bank of $12,317 and $35,138 for the three-month
periods, respectively, were based on a servicing fee rate of .375% of the
outstanding principal balances of the Residential and Commerical Mortgage Loans,
pursuant to the servicing agreements between the Company and the Bank. General
and administrative expenses consist primarily of insurance and outside audit
costs. See "Comparison of six months ended June 30, 1999 to six months ended
June 30, 1998" for further discussion of operating expenses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. Neither the Company,
the Bank or any affiliate of the Bank is currently involved in nor, to the
Company's knowledge, is currently threatened with any material litigation with
respect to the Residential Mortgage Loans or Commercial Mortgage Loans included
in the Company's portfolio, which litigation would have a material adverse
effect on the business or operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by item 601 of Regulation S-K are set forth below.
NO. EXHIBIT
11 Computation of Net Income Per Common Share
12 Computation of ratio of income to fixed charges and Preferred Stock
dividend requirements.
27 Financial Data Schedule
(b) No reports on Form 8-K were issued during the six months ended June 30, 1999
10
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Southfield, Michigan on
August 12, 1999.
FRANKLIN FINANCE CORPORATION
(Registrant)
By: /s/ David F. Simon
--------------------------------------
David F. Simon
Director & Secretary
(Duly authorized representative)
By: /s/ David L. Shelp
--------------------------------------
David L. Shelp
Director, Treasurer and Chief Financial Officer
(Principal financial and accounting officer)
11
<PAGE> 14
Exhibit Index
Exhibit No. Description
11 Computation of Net Income Per Common Share
12 Computation of ratio of income to fixed charges and
Preferred Stock dividend requirements
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
FRANKLIN FINANCE CORPORATION
COMPUTATION OF NET INCOME PER SHARE
Net income for basic income per share is computed by subtracting from the
applicable income the dividend requirements on preferred stock to arrive at
income applicable to common stock and dividing this amount by the weighted
average number of shares of common stock outstanding during the period.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
------------------------------------------------------------
June 30, June 30,
1999 1998 1999 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME
Net income $1,180,362 $1,407,336 $ 565,751 $ 661,719
Less: preferred stock dividend requirements 900,450 900,997 450,225 450,225
- -------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock 279,912 506,339 115,526 211,494
SHARES
Weighted average number of common shares outstanding 22,077 22,077 22,077 22,077
NET INCOME PER SHARE $ 12.68 $ 22.94 $ 5.23 $ 9.58
</TABLE>
12
<PAGE> 1
EXHIBIT 12
COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES AND PREFERRED STOCK DIVIDEND
REQUIREMENTS
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------------------------------------------------
June 30, June 30,
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net income 1,180,362 1,407,336 565,751 661,719
Fixed charges:
Income before fixed charges 1,180,362 1,407,336 565,751 661,719
Fixed charges, as above
Preferred stock dividend requirements 900,450 900,997 450,225 450,225
Fixed charges including preferred
stock dividends 900,450 900,997 450,225 450,225
Ratio of income to fixed charges and
preferred stock dividend requirements 1.31 1.56 1.26 1.47
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 1,679,150 2,590,394
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 17,684,446 0
<INVESTMENTS-CARRYING> 17,684,446 0
<INVESTMENTS-MARKET> 17,684,446 0
<LOANS> 22,529,852 34,575,883
<ALLOWANCE> 12,000 12,000
<TOTAL-ASSETS> 42,338,997 42,150,299
<DEPOSITS> 0 0
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 471,502 0
<LONG-TERM> 0 0
0 0
20,700,000 20,700,000
<COMMON> 6,623,100 6,623,100
<OTHER-SE> 14,544,395 14,827,200
<TOTAL-LIABILITIES-AND-EQUITY> 42,338,997 42,150,300
<INTEREST-LOAN> 963,359 1,567,999
<INTEREST-INVEST> 352,540 0
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 1,315,899 1,567,999
<INTEREST-DEPOSIT> 0 0
<INTEREST-EXPENSE> 0 0
<INTEREST-INCOME-NET> 1,315,899 1,567,999
<LOAN-LOSSES> 0 12,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 135,537 1,049,659
<INCOME-PRETAX> 279,912 506,340
<INCOME-PRE-EXTRAORDINARY> 279,912 506,340
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 279,912 506,340
<EPS-BASIC> 12.68 22.94
<EPS-DILUTED> 12.68 22.94
<YIELD-ACTUAL> 7.70 9.00
<LOANS-NON> 0 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 0 0
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 0 0
<ALLOWANCE-DOMESTIC> 0 0
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
