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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] 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: 0-16362
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FIRST FRANKLIN CORPORATION
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(Name of small business issuer in its charter)
Delaware 31-1221029
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4750 Ashwood Drive, Cincinnati, Ohio 45241
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 469-5352
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Securities registered pursuant to Section 12(b) of the Exchange Act:
None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $17.72 million.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the last sale price quoted on The Nasdaq National Market
as of March 10, 1999, was $17.23 million. (The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the Registrant that such person is an affiliate of the Registrant.)
1,704,373 of the issuer's common shares were issued and outstanding on March 10,
1999.
Documents Incorporated by Reference and Included as Exhibits:
Part II of Form 10-KSB - Portions of 1998 Annual Report to Stockholders
Part III of Form 10-KSB - Portions of Proxy Statement for 1999
Annual Meeting of Stockholders
Transitional Small Business Disclosure Format Yes No X
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Index to Exhibits on page 33
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PART I
ITEM 1. BUSINESS
FIRST FRANKLIN CORPORATION
First Franklin Corporation (the "Company"), the holding company for The
Franklin Savings and Loan Company ("Franklin"), was incorporated under the laws
of the State of Delaware in September 1987 for the purpose of acquiring and
holding all of the outstanding stock of Franklin issued upon its conversion from
an Ohio mutual savings and loan association to an Ohio stock savings and loan
association (the "Conversion"). The Conversion was completed on January 25,
1988.
As a Delaware corporation, the Company is authorized to engage in any
activity permitted by Delaware General Corporation Law. As a unitary savings and
loan holding company, the Company is subject to regulation and examination by
the Office of Thrift Supervision (the "OTS"). The assets of the Company, on an
unconsolidated basis, consist primarily of cash, investment securities and the
stock of Franklin and DirectTeller Systems, Inc.
Congress is considering legislation to eliminate the separate federal
regulation of savings and loan associations. As a result, the Company might
become subject to a different form of holding company regulation, which may
limit the activities in which it may engage and subject it to additional
regulatory requirements, including separate capital requirements. The Company
cannot predict when or whether Congress may actually pass such legislation or
whether such legislation will actually change the regulation and permissible
activities of the Company. Although such legislation may change the activities
in which the Company may be authorized to engage, it is not anticipated that its
current activities will be materially affected.
The executive offices of the Company are located at 4750 Ashwood Drive,
Cincinnati, Ohio 45241, and its telephone number is (513) 469-5352.
THE FRANKLIN SAVINGS AND LOAN COMPANY
Franklin, an Ohio-chartered stock savings and loan association,
conducts business from its main office in Cincinnati, Ohio, and its seven branch
offices in Hamilton County, Ohio. Franklin was originally chartered under the
name Green Street Number 2 Loan and Building Company in 1883. At December 31,
1998, Franklin had approximately $238.29 million of assets, deposits of
approximately $202.36 million and stockholders' equity of approximately
$15.53 million.
The principal business of Franklin is the acceptance of savings
deposits from the general public and the origination of mortgage loans for the
purpose of financing, refinancing or constructing one- to four-family owner
occupied residential real estate. To a lesser extent, Franklin provides loans
secured by multi-family real estate and nonresidential real estate and loans for
consumer purposes.
Accepting deposits and originating loans subjects Franklin to interest
rate risk when there is a timing difference between the repricing or maturity of
the deposits and the repricing or maturity of the loans. Franklin originates
adjustable-rate mortgage loans ("ARMs") and purchases adjustable-rate
mortgage-backed securities in order to reduce the gap between the effective
maturities or repricing of its liabilities and assets.
Franklin's income is derived primarily from interest and fees earned in
connection with its lending activities, and its principal expenses are interest
paid on savings deposits and operating expenses. The primary component of its
net income is its net interest income, which is the difference between interest
income from loans and investments and interest expense on deposits and
borrowings. The interest income and interest expense of Franklin change as the
interest rates on mortgages, securities and other assets and on deposits and
other liabilities change. Interest rates may change because of general economic
conditions, the policies of various regulatory authorities and other factors
beyond Franklin's control. The interest rates on specific assets and liabilities
of Franklin will change or "reprice" in accordance with the contractual terms of
the asset or liability instrument and in accordance with customer reaction to
general economic trends. In a rising interest rate environment, loans tend to
prepay slowly and new loans at higher rates increase slowly, while interest paid
on deposits increases rapidly because the terms to maturity of deposits tend to
be shorter than the terms to maturity or prepayment of loans. Such differences
in the adjustment of interest rates on assets and liabilities may negatively
affect Franklin's income. Moreover, rising interest rates tend to decrease loan
demand in general, negatively affecting Franklin's income. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Asset/Liability Management" in the portions of the Annual Report to Stockholders
attached hereto as Exhibit 13 (the
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"Annual Report") for additional information regarding this maturity or repricing
timing difference and the impact of interest rates on Franklin's operating
results.
Franklin's deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") in the Savings Association Insurance Fund (the "SAIF")
up to maximum levels permitted. Franklin is subject to examination and
comprehensive regulation by the Ohio Department of Commerce, Division of
Financial Institutions (the "Division"), the OTS and the FDIC. Franklin is also
a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati, which is one
of the 12 regional banks comprising the FHLB System. Franklin is subject to
regulations of the Federal Reserve Board (the "FRB") with respect to reserves
required to be maintained against certain deposits and certain other matters.
See "Regulation."
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations. As a result, Congress may eliminate the OTS, and Franklin may be
regulated under federal law as a bank or may be required to change its charter.
Such change in regulation or charter would likely change the range of activities
in which Franklin may engage and would probably subject Franklin to more
regulation by the FDIC. Franklin and the Company cannot predict when or whether
Congress may actually pass legislation regarding Franklin's regulatory
requirements or charter. Although such legislation may change the activities in
which Franklin may engage, it is not anticipated that its current activities
will be materially affected by those activity limits.
Franklin's executive offices are located at 4750 Ashwood Drive,
Cincinnati, Ohio 45241, and its telephone number at that address is
(513) 469-8000.
LENDING ACTIVITIES
GENERAL. The primary source of revenue to Franklin is interest and fee
income from lending activities. The principal lending activity of Franklin is
investing in conventional first mortgage real estate loans to enable borrowers
to purchase, refinance or construct one- to four-family residential real
property. Franklin also makes loans secured by multi-family residential and
nonresidential real estate and consumer loans, and occasionally purchases
participation interests in multi-family and nonresidential real estate loans
originated by other lenders.
Franklin's current lending strategy is to originate and sell fixed-rate
loans, while retaining the servicing rights on such loans, and to originate
adjustable-rate loans for retention in its own portfolio. When consumer demand
for ARMs declines, Franklin may purchase adjustable-rate mortgage-backed
securities to offset the lack of demand in the market area for ARMs. During
1998, interest rates offered on fixed-rate loans declined from levels
experienced during the past few years, so demand for fixed-rate mortgage loans
increased. This increase in originations of fixed rate mortgage loans allowed
Franklin to increase the amount of loans sold during 1998 to $17.36 million from
$11.71 million during 1997. No loans were held for sale at December 31, 1998.
During 1996, Franklin entered into an agreement with the Student Loan
Funding Corporation to sell all student loans that are in the repayment stage.
Loans totaling $226,000 were sold under that agreement in 1998 at a profit of
$6,200 compared to $354,000 at a profit of $7,300 in 1997 and $842,000 at a
profit of $11,000 in 1996.
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The following table sets forth information concerning the composition
of Franklin's loan portfolio, including mortgage-backed securities, in dollar
amounts and in percentages, by type of loan and by type of security before net
items:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Loans secured by
real estate:
Residential $128,030 61.09% $128,152 66.91% $127,046 65.92%
Nonresidential 15,572 7.43 18,071 9.43 15,126 7.85
Construction 7,149 3.41 6,130 3.20 7,719 4.00
Consumer and other loans 2,991 1.43 3,829 2.00 4,120 2.14
-------- ------ -------- ------ -------- ------
153,742 73.36 156,182 81.54 154,011 79.91
-------- ------ -------- ------ -------- ------
Loans held for sale - - - - - -
Mortgage-backed securities
Held to maturity 12,355 5.90 17,158 8.95 19,622 10.18
Available for sale 43,462 20.74 18,208 9.51 19,107 9.91
--------- ------ -------- ------ -------- ------
55,817 26.64 35,366 18.46 38,729 20.09
--------- ------ -------- ------ -------- ------
Total loans receivable
(before net items) $209,559 100.00% $191,548 100.00% $192,740 100.00%
======== ====== ======== ====== ======== ======
TYPE OF RATE
Fixed rate $103,196 49.24% $ 85,265 44.51% $ 78,677 40.82%
Adjustable rate 105,425 50.31 104,759 54.69 112,123 58.17
Passbook adjustable rate(1) 938 0.45 1,524 0.80 1,940 1.01
-------- ------ -------- ------ -------- ------
Total loans receivable
(before net items) $209,559 100.00% $191,548 100.00% $192,740 100.00%
======== ====== ======== ====== ======== ======
TYPE OF SECURITY
Residential:
Single-family $172,994 82.55% $152,199 79.46% $154,136 79.97%
2-4 family 9,004 4.30 8,125 4.24 8,214 4.26
Multi-family 7,723 3.68 8,124 4.24 8,781 4.56
Nonresidential real estate 16,847 8.04 19,271 10.06 17,489 9.07
Student loans 439 0.21 415 0.22 533 .28
Consumer and other loans 2,552 1.22 3,414 1.78 3,587 1.86
-------- ------ -------- ------ -------- ------
Total loans receivable
(before net items) $209,559 100.00% $191,548 100.00% $192,740 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
- ----------------------------
(1) Loans have interest rates that adjust in accordance with the rates paid on
Franklin's passbook savings accounts.
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The following table presents a reconciliation of Franklin's loans
receivable and mortgage-backed securities after net items:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable and mortgage-backed
securities (before net items) $209,559 $191,548 $192,740
Less:
Loans in process 2,431 2,256 2,708
Deferred loan fees 44 162 241
Allowance for possible loan losses 1,092 1,015 929
Unearned expense (5) (4) (3)
Unrealized gain on available for sale
mortgage-backed securities (60) (547) (395)
-------- -------- --------
Total 3,502 2,882 3,480
-------- -------- --------
Loans receivable and mortgage-backed
securities - net $206,057 $188,666 $189,260
======== ======== ========
</TABLE>
The following schedule presents the contractual maturity of Franklin's
loan and mortgage-backed securities portfolio at December 31, 1998. Mortgages
which have adjustable or renegotiable interest rates are shown as maturing in
the period during which the interest rates are subject to change. Loans with
interest rates tied to the interest rates of Franklin's passbook accounts are
included as maturing during the period ending December 31, 1999.
<TABLE>
<CAPTION>
One- to four-family
real estate Other real estate Mortgage-backed Consumer and
mortgage loans mortgage loans securities other loans Total
------------------- ----------------- ----------------- ---------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Average average average average average
Amount rate Amount rate Amount rate Amount rate Amount rate
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due during years
ending December 31:
1999 $ 35,440 7.48% $ 9,450 8.22% $34,469 6.10% $1,705 6.78% $ 81,064 6.96%
2000 and 2001 10,558 8.10 6,487 8.77 1,175 5.36 617 8.63 18,837 8.18
2002 and 2003 4,634 7.87 3,096 9.13 9,494 6.11 276 8.16 17,500 7.14
2004 to 2008 9,599 7.36 1,439 8.43 5,015 5.89 248 8.51 16,301 7.02
2009 to 2018 24,681 7.12 1,840 8.10 345 7.23 145 9.17 27,011 7.20
2019 and following 41,730 7.33 1,797 7.44 5,319 7.21 - - 48,846 7.32
-------- ---- ------- ---- ------- ---- ------ ---- --------
Total $126,642 7.42% $24,109 8.43% $55,817 6.18% $2,991 7.55% $209,559 7.21%
======== ======= ======= ====== ========
</TABLE>
As of December 31, 1998, the total amount of loans and mortgage-backed
securities maturing or repricing after December 31, 1999, consisted of $30.33
million of adjustable-rate loans and $98.17 million of fixed-rate loans.
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The following table shows the loan origination, purchase and sale
activity, including mortgage-backed securities, of Franklin during the periods
indicated:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Loans originated:
One- to four-family $58,762 $43,275 $34,598
Multi-family 523 72 2,405
Nonresidential 139 825 1,047
Land - 82 612
Consumer 1,545 3,278 2,718
------- ------- -------
Total loans originated 60,969 47,532 41,380
Mortgage-backed securities purchased 40,910 2,551 4,005
Loans purchased 30 24 1,058
------- ------- -------
Total loans originated and
mortgage-backed securities and
loans purchased 101,909 50,107 46,443
------- ------- -------
Loans sold:
One- to four-family 17,365 11,712 3,444
Multi-family - - 608
Student 226 354 842
Mortgage-backed securities sold 6,335 - -
Principal reductions and payoffs 59,971 39,233 34,922
------- ------- -------
Increase (decrease) in loans receivable 18,012 (1,192) 6,627
Increase in net items (621) 598 1,992
------- ------- -------
Net increase (decrease) in loans receivable $17,391 $ (594) $ 8,619
======= ======= =======
</TABLE>
In addition to interest earned on loans, Franklin receives fees for
loan originations, modifications, late payments, transfers of loans due to
changes of property ownership and other miscellaneous services. The fees vary
from time to time, generally depending on the supply of funds and other
competitive conditions in the mortgage market and the time and costs incurred by
Franklin in processing the request. When loans are sold, Franklin typically
retains the responsibility for servicing the loans. During 1998, Franklin sold
approximately $17.36 million in fixed-rate residential loans to the Federal Home
Loan Mortgage Corporation ("FHLMC"). At December 31, 1998, Franklin serviced
$55.89 million in loans previously sold to others. Other loan fees and charges
representing servicing costs are recorded as income when collected. Loan
originations during 1998 were $60.97 million, an increase of 28.27% above 1997
levels. This increase in loan originations was the result of a favorable
interest rate environment and a more active loan origination program. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Asset/Liability Management, and - Liquidity" in the Annual Report.
Loans are originated primarily in, and within 25 miles of, Cincinnati
and come from various sources, including walk-in and existing customers,
customer referrals, loan solicitors employed by Franklin, real estate agents
and, to a lesser extent, loan brokers and builders. Loan applications are
reviewed by salaried employees. Franklin's loan committee, comprised of at least
two officers, one of whom must be the Chief Lending Officer, has the authority
to approve real estate loans of up to $350,000. The President has the authority
to approve loans in amounts of up to $1.0 million. Other loans must be approved
by the Executive Committee or the Board of Directors. Real estate pledged to
secure a loan is appraised by a designated appraiser.
All mortgage loans originated by Franklin contain a "due-on-sale"
clause providing that Franklin may declare the unpaid principal balance due and
payable upon the sale or other transfer of the mortgaged property. Franklin
enforces these due-on-sale clauses to the extent permitted by law, taking other
business factors into consideration.
FEDERAL LENDING LIMIT. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower (the
"Lending Limit") to an amount equal to 15% of the association's total capital
for risk-based capital purposes plus any loan reserves not already included in
total capital (the "Lending Limit Capital"). A savings association may loan to
one borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if
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the additional amount is fully secured by certain forms of "readily marketable
collateral." Real estate is not considered "readily marketable collateral." An
exception to the Lending Limit permits loans of any type to one borrower of up
to $500,000. In addition, the OTS, under certain circumstances, may permit
exceptions to the Lending Limit on a case-by-case basis. In applying the Lending
Limit, loans to certain related or affiliated borrowers are aggregated.
Based on the 15% Lending Limit, Franklin was able to lend approximately
$2.41 million to one borrower at December 31, 1998. Franklin had no outstanding
loans in excess of such limit at December 31, 1998.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The cornerstone of
Franklin's lending program has been the origination of loans secured by one- to
four-family residences. At December 31, 1998, $182.00 million, or 86.85%, of
Franklin's real estate loan and mortgage-backed securities portfolio consisted
of loans on one- to four-family residences, the great majority of which are
located in Southwestern Ohio.
In order to reduce its exposure to changes in interest rates, Franklin
has attempted to de-emphasize the origination of long-term, fixed-rate loans for
its own portfolio and to increase its originations of ARMs when market
conditions are favorable. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management" in the Annual
Report. During 1998, as a result of declining interest rates, originations of
ARMs decreased and originations of thirty-year and fifteen-year fixed-rate
mortgage loans, many of which are eligible for sale in the secondary market,
increased. Origination and retention of fixed-rate loans tends to increase
Franklin's exposure to changes in interest rates but also increases interest
income because of the higher yields on fixed-rate loans.
Franklin currently offers one- to four-family residential ARMs with
adjustment periods ranging from one to three years and interest rate indices
based on U.S. Treasury securities with a comparable term. Interest rate
increases are generally limited to 2% per adjustment period and 6% over the life
of the loan. At December 31, 1998, ARMs (not including loans with interest rates
tied to the rates paid on Franklin's passbook accounts) totaled $105.43 million.
Franklin has originated a number of its ARMs with initial interest
rates below those which would be indicated by reference to the repricing index.
Since the interest rate and payment amount on such loans may increase at the
next repricing date, these loans were originally underwritten assuming that the
maximum increase would be experienced at the first adjustment. Notwithstanding
the assumptions made at origination, Franklin could still experience an
increased rate of delinquencies as such loans adjust to the fully-indexed rates.
At December 31, 1998, $1.64 million of Franklin's ARMs were delinquent thirty
days or more. This represents 1.56% of all ARMs outstanding at that date, an
increase of $320,000, or 24.24% from the prior year. See "Non-Performing Assets,
Classified Assets, Loan Delinquencies and Defaults."
When making a one- to four-family residential mortgage loan, Franklin
evaluates both the borrower's ability to make principal and interest payments
and the value of the property that will secure the loan. Franklin generally
makes loans on one- to four-family residential property in amounts of 80% or
less of the appraised value thereof. Where loans are made in amounts which
exceed 80% of the appraised value of the underlying real estate, Franklin's
policy is to require private mortgage insurance on a portion of the loan.
MULTI-FAMILY RESIDENTIAL AND NONRESIDENTIAL REAL ESTATE LENDING. As of
December 31, 1998, approximately $24.57 million, or 11.72%, of Franklin's total
real estate loan and mortgage-backed securities portfolio consisted of real
estate loans secured by multi-family residential and nonresidential properties.
Franklin's multi-family residential and nonresidential real estate loans include
permanent and construction loans secured by liens on apartments, condominiums,
office buildings, churches, warehouses and other commercial properties. Franklin
does not generally require third party takeout commitments prior to originating
loans on construction projects as it typically provides permanent financing on
such projects.
While Franklin's multi-family residential and nonresidential real
estate loans have been originated with a variety of terms, most of such loans
mature or reprice in three years or less. Loan fees on originated loans have
generally been 1.0% of the original loan amount (plus expenses). At December 31,
1998, $24.43 million, or 99.43%, of Franklin's multi-family residential or
nonresidential real estate loans were secured by properties located within the
State of Ohio or in locations within 25 miles of Cincinnati.
Properties securing multi-family residential and nonresidential real
estate loans originated by Franklin are appraised at the time of the loan by
appraisers designated by Franklin (or the lead lender in the case of a loan
participation).
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Franklin currently seeks to invest in loans in amounts of 80% or less
of the appraised value of the property securing the loan. In some cases,
Franklin's collateral includes junior liens on additional properties owned by
the borrower. In underwriting multi-family residential and nonresidential real
estate loans (or evaluating the purchase of a loan participation therein), it is
the policy of Franklin to consider, among other things, the terms of the loan,
the creditworthiness and experience of the borrower, the location and quality of
the collateral, the debt service coverage ratio and, if applicable, the past
performance of the project.
Multi-family residential and nonresidential real estate loans typically
involve large loan balances to single borrowers or groups of borrowers. Of
Franklin's multi-family residential and nonresidential real estate loans and
participations at December 31, 1998, one had a principal balance of more than
$1.0 million and five others had principal balances in excess of $500,000. At
December 31, 1998, Franklin had four borrowers, or groups of borrowers, with
loans in excess of $1.0 million, for a total of $5.67 million. The largest
amount outstanding to any of these borrowers or groups of borrowers was
approximately $1.85 million.
Multi-family residential and nonresidential real estate loans are made
at higher rates and for shorter terms than those generally obtainable for one-
to four-family residential mortgage loans. Multi-family residential and
nonresidential real estate lending, however, entails additional credit risk as
compared to one- to four-family residential mortgage lending, and the borrower
typically depends upon income generated by the collateral real estate project to
cover operating expenses and debt service. Therefore, the payment experience on
loans secured by income producing properties typically is dependent on the
successful operation of the related project and thus may be subject to a greater
extent to adverse conditions in the real estate market or in the economy
generally. Finally, because of the complexity of many multi-family residential
and nonresidential real estate projects, it may be difficult to accurately
assess the value of the underlying projects. For these and other reasons,
Franklin could experience problems in certain of its investments in multi-family
residential and nonresidential real estate loans. See "Non-Performing Assets,
Classified Assets, Loan Delinquencies and Defaults."
Federal regulations limit the amount of nonresidential mortgage loans
which Franklin may make to 400% of total capital, unless otherwise permitted by
the FDIC. At December 31, 1998, Franklin's nonresidential mortgage loan
portfolio was $16.85 million, or 108.50% of its total capital.
CONSUMER LENDING. Franklin originates consumer loans for personal,
family or household purposes, such as the financing of home improvements,
automobiles, boats, recreational vehicles and education. At December 31, 1998,
$2.99 million, or 1.43%, of Franklin's total loan and mortgage-backed securities
portfolio consisted of consumer loans. During the fourth quarter of 1998,
Franklin began offering variable rate home equity line of credit loans. Customer
acceptance of this new product has been very good. Although consumer loans
generally involve a higher level of risk than one- to four-family residential
mortgage loans, they typically carry higher yields and have shorter terms to
maturity than such loans.
MORTGAGE-BACKED SECURITIES. In recent years, at times when loan demand
declines, Franklin has purchased mortgage-backed securities insured or
guaranteed by government agencies. Franklin intends to continue to purchase such
mortgage-backed securities when conditions favor such a portfolio investment. At
December 31, 1998, mortgage-backed securities totaled approximately $55.82
million, or 26.64% of total loans and mortgage-backed securities, of which
$12.36 million were designated as being held to maturity. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, those
mortgage-backed securities designated as being held to maturity are carried on
Franklin's balance sheet at cost. The market value of the $12.36 million in
mortgage-backed securities designated as being held to maturity as of December
31, 1998, was $12.47 million. The remaining $43.46 million in mortgage-backed
securities held at December 31, 1998, was designated as available for sale. In
accordance with SFAS No. 115, the mortgage-backed securities available for sale
are carried on Franklin's balance sheet at market value, with unrealized gains
or losses carried as an adjustment to shareholders' equity, net of applicable
taxes.
Franklin maintains a significant portfolio of mortgage-backed
pass-through securities in the form of Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA") and Government
National Mortgage Association ("GNMA") participation certificates.
Mortgage-backed pass-through securities generally entitle Franklin to receive a
portion of the cash flows from an identified pool of mortgages and gives
Franklin an interest in that pool of mortgages. FHLMC, FNMA and GNMA securities
are each guaranteed by their respective agencies as to principal and interest.
Franklin has also invested $460,000 in a collateralized mortgage
obligation ("CMO"), which is secured by mortgages on multi-family apartment
complexes. Although it can be useful for hedging and investment, a CMO can
expose the investor
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to higher risk of loss than direct investments in mortgage-backed pass-through
securities, particularly with respect to price volatility and the lack of a
broad secondary market in such securities. The OTS has deemed certain CMOs and
other mortgage derivative products to be "high-risk." Franklin's CMO is not in
such "high-risk" category.
Mortgage-backed securities generally yield less than loans directly
originated by Franklin. However, these securities present less credit risk,
because they are guaranteed as to principal repayment by the issuing corporation
or by the underlying collateral. Although CMOs and other mortgage-backed
securities designated as available for sale are a potential source of liquid
funds for loan originations and deposit withdrawals, the prospect of a loss on
the sale of such investments limits the usefulness of these investments for
liquidity purposes.
At December 31, 1998, Franklin had $12.71 million, or 22.77%, in fixed
rate mortgage-backed securities. Because they do not adjust relative to current
interest rates, retention of these fixed-rate mortgage-backed securities could
adversely impact Franklin's earnings, particularly in a rising interest rate
environment.
At December 31, 1998, $43.11 million, or 77.23%, of Franklin's
mortgage-backed securities had adjustable rates. Although adjustable-rate
securities generally have a lower yield at the time of origination than
fixed-rate securities, the interest rate risk associated with adjustable-rate
securities is lower. In addition, Franklin has purchased adjustable-rate
mortgage-backed securities as part of its effort to reduce its interest rate
risk. In a period of declining interest rates, Franklin is subject to prepayment
risk on such adjustable-rate mortgage-backed securities. Franklin attempts to
mitigate this prepayment risk by purchasing mortgage-backed securities at or
near par. If interest rates rise in general, the interest rates on the loans
backing the mortgage-backed securities will also adjust upward, subject to the
interest rate caps in the underlying adjustable-rate mortgage loans. However,
Franklin is still subject to interest rate risk on such securities if interest
rates rise faster than the 1% to 2% maximum annual interest rate adjustments on
the underlying loans. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management" in the Annual
Report.
The following table sets forth certain information regarding Franklin's
investment in mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At December 31, At December 31, 1997
--------------------------------------------- ----------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated
cost gains losses fair value cost gains losses fair value
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgaged-backed securities held
to maturity:
FHLMC participation certificates $ 6,501 $116 $3 $ 6,614 $ 9,795 $144 $ 31 $ 9,908
FNMA participation certificates 5,394 2 1 5,395 6,894 - 106 6,788
CMOs 460 - - 460 469 - - 469
------- ---- --- ------- ------- ---- ---- -------
$12,355 $118 $4 $12,469 $17,158 $144 $137 $17,165
======= ==== === ======= ======= ==== ==== =======
Mortgage-backed securities
available for sale:
FHLMC participation certificates $ 7,177 $ 17 $12 $ 7,182 $ 3,143 $111 $ - $ 3,254
FNMA participation certificates 17,794 66 14 17,846 7,033 166 9 7,190
GNMA participation certificates 18,491 50 47 18,494 8,032 278 - 8,310
------- ---- --- ------- ------- ----- ---- -------
$43,462 $133 $73 $43,522 $18,208 $555 $ 9 $18,754
======= ==== === ======= ======= ==== ==== =======
</TABLE>
The combined amortized cost of mortgage-backed and related securities
designated as held to maturity or available for sale at December 31, 1998 and
1997, by contractual terms to maturity are shown below. Actual maturities will
differ from contractual maturities because borrowers generally may prepay
obligations without prepayment penalties. Also, the timing of cash flows will be
affected by management's intent to sell securities designated as available for
sale under certain economic conditions.
-9-
<PAGE> 10
<TABLE>
<CAPTION>
Amortized cost at December 31,
---------------------------------
1998 1997
-------- ---------
(In thousands)
<S> <C> <S>
Due within one year - $ 488
Due after one through three years $ 1,183 1,650
Due after three years through five years 853 -
Due after five years through ten years 5,014 1,012
Due after ten years through twenty years 1,265 9,997
Due after twenty years 47,502 22,219
------- --------
$55,817 $35,366
======= =======
</TABLE>
NON-PERFORMING ASSETS, CLASSIFIED ASSETS, LOAN DELINQUENCIES AND
DEFAULTS. When a borrower fails to make a required payment on a loan, Franklin
attempts to cause the delinquency to be cured by contacting the borrower. A
notice is mailed to the borrower after a payment is 15 days past due and again
when the loan is 30 days past due. In most cases, delinquencies are cured
promptly. When deemed appropriate by management, Franklin institutes action to
foreclose on the property or to acquire it by deed in lieu of foreclosure. If
foreclosed, real property is sold at a public sale and may be purchased by
Franklin.
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered by the OTS to be of lesser
quality as "substandard," "doubtful" and "loss" assets. The regulations require
savings associations to classify their own assets and to establish prudent
general allowances for losses for assets classified "substandard" and
"doubtful." For the portion of assets classified as loss, an institution is
required to either establish a specific allowance of 100% of the amount
classified or charge off such amount. In addition, the OTS may require the
establishment of a general allowance for loan losses based on the general
quality of the asset portfolio of an institution. Assets which do not currently
expose the institution to sufficient risk to warrant classification in one of
the aforementioned categories but possess potential weaknesses are required to
be designated "special mention" by management. At December 31, 1998, $1.35
million of Franklin's loans and other assets were classified as "substandard,"
$363,000 were classified as "loss," no assets were classified as "doubtful" and
$1.69 million were classified "special mention," for a total of $3.40 million,
or 2.26%, of Franklin's loans receivable (net) designated as classified or
special mention assets.
The table below sets forth information concerning delinquent mortgages
and other loans as of the dates indicated. The amounts presented represent the
total remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
30-59 days $2,513 $1,174 $2,551 $1,010 $ 889
60-89 days 1,075 933 699 902 392
90 days and over 797 988 694 1,017 1,128
------ ------ ------ ------ ------
Total $4,385 $3,095 $3,944 $2,929 $2,409
====== ====== ====== ====== ======
</TABLE>
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" on January 1, 1995. Under that standard, a loan is
considered impaired, based on current information and events, if it is probable
that the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement.
The measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the loan's interest rate, except that
all collateral-dependent loans are measured for impairment based on the fair
value of the collateral. At December 31, 1998, the Company had not identified
any loans as impaired.
The following table sets forth the amounts of Franklin's non-performing
assets, which include non-accruing loans, accruing loans which are delinquent 90
days or more, repossessed assets and renegotiated loans. Loans are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful or legal action to foreclose has commenced. In addition, all loans,
except one- to four-family residential mortgage loans, are placed on non-accrual
status when the uncollected interest becomes greater than ninety days past due.
All consumer loans more than 90 days delinquent are charged
-10-
<PAGE> 11
against the consumer loan allowance for loan losses unless payments are
currently being received and it appears likely that the debt will be collected.
Repossessed assets include assets acquired in settlement of loans. All loan
amounts reported do not reflect any specific valuation allowances which have
been established.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate $ 342 $ 249 $ 154 $ 368 $ 383
Nonresidential real estate -- -- -- -- 138
Consumer 243 200 214 204 354
------ ------ ------ ------ ------
Total 585 449 368 572 875
------ ------ ------ ------ ------
Total as a percentage of total assets 0.24% 0.19% 0.17% 0.27% 0.45%
Accruing loans delinquent more than 90 days:
Residential real estate 806 599 325 422 243
Nonresidential real estate -- -- -- -- --
Consumer -- -- -- 23 10
------ ------ ------ ------ ------
Total 806 599 325 445 253
------ ------ ------ ------ ------
Total as a percentage of total assets 0.34% 0.26% 0.15% 0.21% 0.13%
Repossessed assets:
Residential real estate -- -- 233 -- --
Nonresidential real estate -- -- -- -- --
------ ------ ------ ------ ------
Total -- -- 233 -- --
------ ------ ------ ------ ------
Total as a percentage of total assets -- -- 0.10% -- --
Renegotiated loans 244 281 321 355 1,047
------ ------ ------ ------ ------
Total non-performing assets $1,635 $1,329 $1,247 $1,372 $2,175
====== ====== ====== ====== ======
Total non-performing assets as a percentage
of total assets 0.68% 0.58% 0.56% 0.64% 1.13%
====== ====== ====== ====== ======
Other loans of concern:
Residential real estate $ 712 $ 424 $ 224 $ 888 $ 587
Nonresidential real estate -- 57 355 389 --
Consumer -- 15 2 9 12
------ ------ ------ ------ ------
Total $ 712 $ 496 $ 581 $1,286 $ 599
====== ====== ====== ====== ======
Total as a percentage of total assets 0.30% 0.22% 0.26% 0.60% 0.31%
====== ====== ====== ====== ======
Unallocated allowance for loan losses $ 649 $ 602 $ 557 $ 525 $ 599
====== ====== ====== ====== ======
Total allowance for loan losses $1,092 $1,015 $ 929 $ 947 $1,256
====== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $26,400. The amount which was included in
interest income on such loans was $33,300 for the year ended December 31, 1998.
As of December 31, 1998, except for other loans of concern discussed
herein, there were no loans which were not included in the table above where
known information about the possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrower to comply
with present loan repayment terms and which may result in disclosure of such
loans in the future.
-11-
<PAGE> 12
As of December 31, 1998, there were no concentrations of loans of any
type which exceeded 10% of Franklin's total loans that are not included as a
loan category in the table above.
Franklin's non-accruing loans at December 31, 1998, consisted of three
one- to four-family residential loans with an aggregate book value of $216,000,
four multi-family loans with an aggregate book value of $126,000 and 25 consumer
loans with an aggregate book value of $243,000. At December 31, 1998, accruing
loans delinquent more than 90 days consisted of eight loans totaling $806,000
secured by one- to four-family residential real estate.
Renegotiated loans consisted of a $244,000 interest in a $1.58 million
loan, after the reduction described below, secured by a 50-unit motel located in
Cincinnati, Ohio. During 1991, the contractual balance on this loan was reduced
by $1.2 million because the property value would not support the higher loan
amount. At the time of this reduction the interest rate was increased from 7.50%
to 10% and the term of the loan shortened from July 1, 2017 to September 1,
1996, with one three-year extension, which has been made. As of December 31,
1998, loss reserves of $163,000 had been established against this loan resulting
in a net book value of $81,000.
Other loans of concern at December 31, 1998, included 15 loans totaling
$712,000 secured by one- to four-family residential real estate.
It is management's policy to establish allowances for loan losses and
to value real estate at the lower of cost or estimated net realizable value when
it determines that losses are expected to be incurred on the underlying
properties. In establishing such loan losses or reevaluating real estate values,
Franklin considers a number of factors, including, but not limited to, trends in
the level of nonperforming assets and classified loans, current and anticipated
economic conditions in its primary lending area, past loss experience, possible
losses arising from specific problem assets and changes in Franklin's loan
portfolio. While management believes that it uses the best information available
to make such determinations, future adjustments may be necessary and net
earnings could be significantly affected if circumstances differ substantially
from the assumptions used in making the initial determination. At December 31,
1998, Franklin had $1.09 million of such allowances, $443,000 of which had been
allocated to specific loans or properties. See Note 3 of the Notes to the
Consolidated Financial Statements and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset Quality/Credit Risk, and
Results of Operations" in the Annual Report.
-12-
<PAGE> 13
The following table sets forth an analysis of Franklin's allowance for
loan losses and repossessed assets:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,015 $ 981 $ 947 $ 1,256 $ 1,279
Charge-offs:
One- to four-family -- 24 31 161 67
Multi-family -- 37 16 -- --
Nonresidential real estate -- -- -- -- 19
Consumer -- 2 11 178 --
------- ------- ------- ------- -------
Total charge-offs -- 63 58 339 86
------- ------- ------- ------- -------
Recoveries:
One-to four-family 1 -- -- -- 1
Multi-family -- -- -- -- --
Nonresidential real estate -- -- -- -- --
Consumer 2 13 -- -- --
------- ------- ------- ------- -------
Total recoveries 3 13 -- -- 1
------- ------- ------- ------- -------
Net charge-offs (3) 50 58 339 85
Additions charged to operations 74 84 92 30 62
------- ------- ------- ------- -------
Balance at end of period $ 1,092 $ 1,015 $ 981 $ 947 $ 1,256
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period (0.002)% 0.03% 0.04% 0.25% 0.06%
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average non-performing assets (0.20)% 3.84% 4.52% 19.11% 2.94%
======= ======= ======= ======= =======
</TABLE>
-13-
<PAGE> 14
The distribution of Franklin's allowance for loan losses and repossessed assets
at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
One- to four-family $ 74 $86.85% $ 32 $83.70% $ -- $84.23% $ 14 $ 84.41 $ 31 83.99%
Multi-family 118 3.68 115 4.24 115 4.56 147 4.79 145 5.64
Nonresidential real estate 164 8.04 187 10.06 187 9.07 187 8.25 262 7.60
Consumer 87 1.43 79 2.00 70 2.14 74 2.55 219 2.77
Unallocated 649 -- 602 -- 557 -- 525 -- 599 --
--------- ------ ----- ------ ------ ------ ----- ------- ------ ------
Total loans (1) 1,092 100.00% 1,01 100.00% 929 100.00 947 100.00% 1,256 100.00%
====== ====== ====== ====== ======
Repossessed assets:
One- to four-family - - 52 - -
Nonresidential real estate - - - - -
--------- ------ ------ ----- ------
Total repossessed assets - - 52 - -
--------- ------ ------ ----- ------
Total allowances $1,092 $1,015 $981 $ 947 $1,256
========= ====== ====== ===== ======
- -----------------
(1) All allowances for loan losses are specific allowances, except for the
unallocated category.
</TABLE>
-14-
<PAGE> 15
INVESTMENT ACTIVITIES
The Company invests primarily in United States Treasury and agency
securities, bank certificates of deposit, obligations issued by states or
municipalities and FHLB overnight funds. Franklin is required by federal
regulations to maintain a minimum amount of liquid assets that may be invested
in specified securities and is also permitted to make certain other securities
investments. The balance of the securities investments maintained by the Company
in excess of regulatory requirements reflects, for the most part, management's
primary investment objective of maintaining a liquidity level that (i) assures
the availability of adequate funds, taking into account anticipated cash flows
and available sources of credit, for meeting withdrawal requests and loan
commitments and making other investments, and (ii) reduces the Company's
vulnerability to changes in interest rates. See Note 2 of the Notes to the
Consolidated Financial Statements and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management, and
- - Liquidity" in the Annual Report.
The OTS also requires depository institutions to establish prudent
policies and strategies for securities transactions, describes securities
trading and sales practices that are unsuitable when conducted in an investment
portfolio and specifies factors that must be considered when evaluating whether
the reporting of an institution's investments is consistent with its intent and
ability to hold such investments. Franklin believes that it currently holds and
reports its securities in a manner consistent with the OTS requirements.
The following table presents the amortized cost and market values of
Franklin's investment securities, which consisted solely of securities
designated as available for sale, at the dates indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- ----------------------
Amortized Market Amortized Market Amortized Market
cost value cost value cost value
--------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government and agency
obligations $18,190 $18,213 $28,634 $28,658 $16,394 $16,285
Obligations of states and
municipalities 851 912 1,106 1,171 1,030 1,073
--------- --------- --------- --------- --------- ---------
Total $19,041 $19,125 $29,740 $29,829 $17,424 $17,358
========= ========= ========= ========= ========= =========
</TABLE>
The composition and maturities of the investment securities portfolio
are indicated in the following table:
<TABLE>
<CAPTION>
At December 31, 1998
----------------------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over Total investment
1 year years years 10 years Securities
--------- --------- --------- --------- ----------------------
Amortized Amortized Amortized Amortized Amortized Market
cost cost cost cost cost value
--------- --------- --------- --------- ----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations $ - $4,500 $12,490 $1,200 $18,190 $18,213
Obligations of states and
municipalities 180 224 301 146 851 912
---- ------- ---------- ------- --------- ---------
Total investment securities $180 $4,724 $12,791 $1,346 $19,041 $19,125
==== ====== ======= ====== ======= =======
Weighted average yield(1) 4.52% 6.25% 6.26% 6.92% 6.29%
- ----------------------------
(1) Yields reflected have not been computed on a tax equivalent basis.
</TABLE>
-15-
<PAGE> 16
SOURCES OF FUNDS
GENERAL. Deposit accounts have traditionally been the principal source
of Franklin's funds for use in lending and for other general business purposes.
In addition to deposits, Franklin derives funds from loan repayments, borrowings
from the FHLB, cash flows generated from operations, which includes interest
credited to deposit accounts, and loan sales. Scheduled loan payments are a
relatively stable source of funds, while deposit inflows and outflows and the
related cost of such funds have varied widely. Borrowings may be used on a
short-term basis to compensate for seasonal reductions in deposits or deposit
inflows at less than projected levels and may be used on a longer term basis to
support expanded lending activities. The availability of funds from loan sales
is influenced by general interest rates. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity" in the
Annual Report.
DEPOSITS. Franklin attracts both short-term and long-term deposits from
the general public by offering a wide assortment of accounts and rates. Franklin
offers regular passbook accounts, checking accounts, various money market
accounts, fixed interest rate certificates with varying maturities, negotiated
rate jumbo certificates of deposit of $100,000 or more ("Jumbo CDs") and
individual retirement accounts and Keogh accounts.
The principal types of savings accounts held by Franklin at December
31, 1998, and the applicable rates are summarized as follows:
<TABLE>
<CAPTION>
Average rate Minimum deposit Amount(1) Percentage of total deposits
------------ --------------- --------- ----------------------------
(In thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
Passbook savings 2.75% $ 100 $23,220 48.38%
NOW 1.76 100 16,561 34.50
Super NOW 2.10 2,500 1,858 3.87
Money market 2.93 2,500 6,361 13.25
---- --------- --------
Total transaction accounts 2.41% $48,000 100.00%
==== ========= ========
Certificates of deposit:
7-31 day 3.00% $ 2,500 $ 298 0.19%
91 day 3.00 2,500 212 0.14
Six months 5.16 2,500 39,904 25.87
One year 5.27 500 19,874 12.88
18 months 5.59 500 25,846 16.75
Two years 5.73 500 27,861 18.06
Three years 5.91 500 17,684 11.46
Five years 5.73 2,500 17,749 11.51
Jumbo certificates(2) 4.48 100,000 4,652 3.02
Other(2) 5.26 500 181 0.12
---- -------- ------
Total certificates 5.47% $154,261 100.00%
==== ======== ======
- ----------------------------
(1) Includes $29.75 million of deposits held in IRA and Keogh accounts.
(2) Maturities vary.
</TABLE>
All accounts earn interest from the date of deposit to the date of
withdrawal. Interest is compounded daily on all accounts except certificates
which are compounded utilizing a 360 day factor applied over 365 days. Interest
can be credited monthly, quarterly or annually at the customer's discretion. At
December 31, 1998, such rates were 2.75% per annum for passbook savings
accounts, 1.99% per annum for regular NOW accounts and 2.11% per annum for Super
NOW accounts. The rates paid on Money Market Accounts vary depending on the
balance in the account.
-16-
<PAGE> 17
Early withdrawals from certificates of deposit are subject to a penalty
of three months simple interest when the original term is from 90 days to one
year, six months simple interest when the original term is one year to three
years, and one year simple interest when the original term is more than three
years.
The following table sets forth information relating to Franklin's
savings flows during the periods shown and total savings at the end of the
periods shown:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Opening balance $202,206 $194,648 $184,574
Deposits 365,659 329,176 321,414
Withdrawals (374,616) (330,673) (319,646)
Interest credited 9,012 9,055 8,306
---------- ---------- -----------
Ending balance $202,261 $202,206 $194,648
========== ========== ===========
</TABLE>
The following table sets forth, as of December 31, 1998, the amounts of
certificates of deposit maturing during the years indicated:
<TABLE>
<CAPTION>
Amounts maturing in the year
ending December 31,
-------------------------------------------------------------------------
2002 and
1999 2000 2001 thereafter
-------------- ------------ ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
4.00% and less $ 658 $ - $ - $ 9
4.01% - 5.00% 27,290 3,144 163 -
5.01% - 6.00% 73,690 21,187 6,235 9,229
6.01% - 7.00% 6,079 5,589 288 484
7.01% - 8.00% 10 20 61 -
8.01% - 10.00% 51 - 31 43
10.01% and over - - - -
-------------- ------------ ---------- ----------
Total $107,778 $29,940 $6,778 $9,765
============== ============ ========== ==========
</TABLE>
-17-
<PAGE> 18
The following table sets forth Franklin's savings flows by type of
account, including interest credited, during the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------
1998 1997 1996
--------- -------- -------
(In thousands)
<S> <C> <C> <C>
Change in deposit balances:
Passbook savings $ 666 $ (1,573) $ (177)
NOW accounts 3,245 (142) (228)
Money market accounts (1,263) (2,005) 296
Certificates:
7-31 day 101 (382) 37
91 day 117 (39) 34
6 months 3,149 3,311 4,927
One year (14,419) 8,124 3,309
18 months 4,301 (1,862) 7,767
Two years 4,208 9,542 3,029
Thirty-two months - (14) (4,289)
Three years 3,835 (6,261) (573)
Five years (4,684) (1,424) (4,632)
Jumbo certificates 965 499 309
Other (166) (216) 265
--------- -------- -------
Total increase $ 55 $ 7,558 $10,074
========= ======== =======
</TABLE>
The following table indicates the amount of Franklin's certificates of
deposit by time remaining until maturity as of December 31, 1998:
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or less months months 12 months Total
-------- -------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000 $39,252 $37,128 $20,044 $38,001 $134,425
Certificates of deposit of
$100,000 or more 4,192 3,873 3,289 8,482 19,836
-------- -------- -------- -------- --------
Total certificates of
deposit $43,444 $41,001 $23,333 $46,483 $154,261
======= ======= ======= ======= ========
</TABLE>
Management believes that the variety of deposit accounts offered by
Franklin has allowed it to be competitive in obtaining funds and to respond with
flexibility (by paying rates of interest more closely approximating market rates
of interest) and to reduce, although not eliminate, the flow of funds into
alternative investment vehicles such as government and corporate securities. In
addition, Franklin has become much more subject to short-term fluctuations in
deposit flows, as customers have become more interest-rate conscious. Therefore,
the ability of Franklin to attract and maintain deposits, and the cost and term
of repricing of its funds, has been, and will continue to be, significantly
affected by money market conditions.
BORROWINGS. As a member of the FHLB of Cincinnati, Franklin is required
to own capital stock in the FHLB of Cincinnati and is authorized to apply for
advances from the FHLB of Cincinnati. Each FHLB credit program has its own
interest rate, which may be fixed or variable, and range of maturities. The FHLB
of Cincinnati may prescribe acceptable uses for these advances and repayment
provisions which apply. Franklin's FHLB advances outstanding at December 31,
1998, were $15.58 million.
-18-
<PAGE> 19
<TABLE>
<CAPTION>
The following table shows the FHLB advances outstanding as of December
31, 1998, by interest rate and maturity date:
Maturity date Interest rate Outstanding balance
------------- ------------- -------------------
(In thousands)
<S> <C> <C>
05/01/06 8.15% $ 197
06/17/08 5.10 2,000
06/18/08 5.38 2,000
09/08/08 4.80 2,000
10/02/08 4.82 1,000
11/06/08 4.64 2,000
11/10/08 4.25 2,000
10/01/10 6.35 3,120
12/01/10 6.30 1,259
---------
$ 15,576
</TABLE>
Franklin's only short-term borrowings (borrowings with remaining
maturities of one year or less) during the year were FHLB advances. The
following table sets forth the maximum amount of short-term FHLB advances
outstanding at any month-end during the periods shown and the average aggregate
balances of short-term FHLB advances for such periods:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding $783 $1,874 $883
Total average amount of borrowings
outstanding $757 $ 976 $443
Weighted average interest cost of borrowings
outstanding 6.39% 6.46% 6.47%
</TABLE>
SUBSIDIARY ACTIVITIES OF FRANKLIN
Franklin has one subsidiary, Madison Service Corporation ("Madison"),
which was organized on February 22, 1972. Madison's only activity is its
contract with a third party registered broker dealer which offers mutual funds
and brokerage services at offices of Franklin. As of December 31, 1998,
Franklin's investment in Madison was $110,000.
Ohio law provides that up to 15% of the assets of an institution may be
invested in stock, obligations or other securities of service corporations.
Federal law generally imposes on state-chartered savings associations the
service corporation investment limits applicable to federal associations, unless
a higher level is permitted by the FDIC. Federal associations generally may
invest up to 2% of their assets in service corporations, plus an additional 1%
if for community purposes. Franklin's investment in its service corporation at
December 31, 1998, did not exceed these limits.
Franklin is also subject to the equity risk investment limitations
imposed under OTS regulations. In general, OTS regulations provide that insured
institutions which meet their minimum regulatory capital requirements and have
"tangible capital" of 6% of total liabilities or greater, must submit for prior
review aggregate equity risk investments exceeding an amount equal to three
times "tangible capital," defined as equity capital as determined in accordance
with GAAP, qualifying subordinated debt, and nonpermanent preferred stock, less
goodwill and other intangible assets. Because Franklin meets it regulatory
capital requirements, has tangible capital in excess of 6% of total liabilities
and does not have equity risk investments in subsidiary corporations in excess
of three times tangible capital, Franklin is currently not limited by the OTS
regulations in making direct investments in subsidiary corporations.
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<PAGE> 20
SUBSIDIARY ACTIVITIES OF THE COMPANY
In 1989, the Company acquired an interest in DirectTeller Systems,
Inc., an Ohio corporation which is engaged in the development, marketing and
sale of computer software designed to enable customers of financial institutions
to obtain account information directly from the institution's computer via a
touch tone telephone and/or facsimile machine. The Company has a 51% interest in
this company and its investment in DirectTeller at December 31, 1998, was
$50,000.
COMPETITION
Franklin faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks and mortgage brokers
and bankers who also make loans secured by real estate located in southwestern
Ohio. Franklin competes for real estate loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.
Franklin faces substantial competition in attracting deposits from
commercial banks, other savings institutions, money market and mutual funds,
credit unions and other investment vehicles. The ability of Franklin to attract
and retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors. Franklin competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours,
access to accounts via automated teller machines, convenient branch locations
with inter-branch deposit and withdrawal privileges at each, and the
"DirectTeller" system discussed above.
As of December 31, 1998, based on total assets, Franklin was the sixth
largest thrift institution headquartered in Hamilton County, Ohio.
EMPLOYEES
At December 31, 1998, Franklin had 49 full-time equivalent employees
and 13 part-time employees.
YEAR 2000 CONSIDERATIONS
As with all financial institutions, Franklin's operations depend almost
entirely on computer systems. Franklin has addressed the potential problems
associated with the possibility that the computers which control or operate
Franklin's operating systems, facilities and infrastructure may not be
programmed to read four-digit date codes and, upon arrival of the year 2000, may
recognize the two-digit code "00" as the year 1900, causing systems to fail to
function or to generate erroneous data.
Franklin has developed a five stage action plan which assesses the
magnitude of the Year 2000 problem, provides a strategy that neutralizes the
impact of these problems, develops contingency plans to be implemented if
critical systems do not become Year 2000 compliant and develops testing
procedures to insure that systems are Year 2000 compliant. The status of this
effort is reported to the Board of Directors on a regular basis. The Company's
technology committee meets on a quarterly basis to monitor the progress being
made and address any problem areas. The awareness, assessment and renovation
phases of this plan are substantially complete. The majority of the validation
phase has been completed and it is anticipated that the remainder will be
completed by the end of the first quarter of 1999.
All third party suppliers of software have either certified their
products as compliant or have indicated that they will be compliant by the end
of the first quarter of 1999. The major provider of data processing services to
Franklin has completed its migration to a Year 2000 ready platform operating
system and data base. Customer testing of transaction processing and
communications equipment was completed during the fourth quarter of 1998 without
any substantial problems. All in-house computer equipment has been tested for
Year 2000 compliance and any necessary replacements have been acquired.
Franklin has not identified any significant expenses which are
reasonably likely to be incurred in future periods in connection with this issue
and does not expect to incur significant expense to implement any necessary
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<PAGE> 21
corrective actions. No assurance can be given, at this time, that significant
expense will not be incurred in future periods. In the unlikely event that
Franklin is ultimately required to purchase replacement computer systems,
programs and equipment, or that substantial expense must be incurred to make
Franklin's current systems, programs and equipment Year 2000 compliant,
Franklin's net income and financial condition could be adversely affected.
In addition to the possible expense related to its own systems,
Franklin could incur losses if loan payments are delayed due to Year 2000
problems affecting any of its significant borrowers or impairing the payroll
systems of large employers in Franklin's primary market area. All major
commercial borrowers are being contacted to determine the status of their Year
2000 efforts. Because Franklin's loan portfolio is highly diversified with
regard to individual borrowers and types of businesses and its primary market
area is not significantly dependent upon one employer or industry, Franklin does
not expect any significant or prolonged difficulties that could affect net
earnings or cash flow.
REGULATION
GENERAL. As a savings and loan association chartered under the laws of
Ohio, Franklin is subject to regulation, examination and oversight by the
Superintendent of the Division (the "Superintendent"). Because Franklin's
deposits are insured by the FDIC, Franklin also is subject to regulation and
examination by the OTS and to regulatory oversight by the FDIC. Franklin must
file periodic reports with the Superintendent and the OTS concerning its
activities and financial condition. Examinations are conducted by regulators
periodically to determine whether Franklin is in compliance with various
regulatory requirements and is operating in a safe and sound manner. Because it
accepts federally insured deposits and offers transaction accounts, Franklin is
also subject to certain regulations issued by the FRB. Franklin is a member of
the FHLB of Cincinnati.
The Company is a Delaware corporation and is subject to regulation,
examination and oversight by the OTS as the holding company of Franklin and is
required to submit periodic reports to the OTS.
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS and
Franklin may be regulated under federal law as a bank or may be required to
change its charter. Such change in regulation or charter would likely change the
range of activities in which Franklin may engage and would probably subject
Franklin to more regulation by the FDIC. In addition, the Company might become
subject to a different form of holding company regulation which may limit the
activities in which the Company may engage and subject the Company to additional
regulatory requirements, including separate capital requirements. The Company
cannot predict when or whether Congress may actually pass legislation regarding
the Company's and Franklin's regulatory requirements or charter. Although such
legislation may change the activities in which the Company and Franklin may
engage, it is not anticipated that the current activities of either the Company
or Franklin will be materially affected by those activity limits.
OHIO REGULATION. The Superintendent is responsible for the regulation,
examination and supervision of Ohio savings and loan associations in accordance
with the laws of the State of Ohio and imposes assessments on Ohio associations
based on their asset size to cover the cost of supervision and examination. Ohio
law prescribes the permissible investments and activities of Ohio savings and
loan associations, including the types of lending that such associations may
engage in and the investments in real estate, subsidiaries and corporate or
government securities that such associations may make. The ability of Ohio
associations to engage in these state-authorized investments and activities is
subject to oversight and approval by the FDIC, if such investments or activities
are not permissible for a federally chartered savings association. See "Federal
Deposit Insurance Corporation." The Superintendent also has approval authority
over any mergers involving or acquisitions of control of Ohio savings and loan
associations. The Superintendent may initiate certain supervisory measures or
formal enforcement actions against Ohio associations. Ultimately, if the grounds
provided by law exist, the Superintendent may place an Ohio association in
conservatorship or receivership.
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of
the Treasury and is responsible for the regulation and supervision of all
federally chartered savings associations and all other savings associations, the
deposits of which are insured by the FDIC in the SAIF. The OTS issues
regulations governing the operation of savings associations, regularly examines
such associations and imposes assessments on savings associations based on their
asset size to cover the costs of general supervision and examination. The OTS
also may initiate enforcement actions against savings associations and certain
persons affiliated with them for violations of laws or regulations or
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for engaging in unsafe or unsound practices. If the grounds provided by law
exist, the OTS may appoint a conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosure, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger transaction. Community
reinvestment regulations evaluate how well and to what extent an institution
lends and invests in its designated service area, with particular emphasis on
low-to-moderate income communities and borrowers in such areas. Franklin has
received a "satisfactory" examination rating under those regulations.
OTS REGULATORY CAPITAL REQUIREMENTS. Franklin is required by OTS
regulations to meet certain minimum capital requirements. The following table
sets forth the amount and percentage level of regulatory capital of Franklin at
December 31, 1998, and the amount by which it exceeds the minimum capital
requirements. Core capital is reflected as a percentage of adjusted total
assets. Total (or risk-based) capital, which consists of core and supplementary
capital, is reflected as a percentage of risk-weighted assets. Assets are
weighted at percentage levels ranging from 0% to 100% depending on their
relative risk.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------
Amount Percent
------ -------
(In thousands)
<S> <C> <C>
Core capital $15,361 6.45%
Requirement 9,525 4.00
-------- ----
Excess $ 5,836 2.45%
======== ====
Total capital $ 16,091 15.26%
Risk-based requirement 8,436 8.00
-------- -----
Excess $ 7,655 7.26%
======== =====
</TABLE>
Current capital requirements call for core capital (which for Franklin
is equity capital under generally accepted accounting principles less goodwill
and the unrealized gain on available-for-sale securities) of 4.0% of adjusted
total assets and risk-based capital (which for Franklin consists of core capital
plus general valuation reserves of $730,000) of 8% of risk-weighted assets. The
OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. Franklin
does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed. Its current core capital level is
6.45% of adjusted total assets.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, although the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio, as determined under the methodology established by
the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
that excess exposure from its total capital when determining its level of
risk-based capital. In general, an association with less than $300 million in
assets and a risk-based capital ratio of greater than 12% will not be subject to
this requirement. Franklin currently qualifies for such exception. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings association it
deems to have excessive interest rate risk. The OTS also may adjust the
risk-based capital requirement on an individual basis for any association to
take into account risks due to concentrations of credit and non-traditional
activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (1) well-capitalized associations must have
total risk-based capital of at least 10%, core
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<PAGE> 23
risk-based capital (consisting only of items that qualify for inclusion in core
capital) of at least 6% and core capital of at least 5%; (2) adequately
capitalized associations are those that meet the regulatory minimum of total
risk-based capital of at least 8%, core risk-based capital (consisting only of
items that qualify for inclusion in core capital) of at least 4% and core
capital of at least 4% (except for associations receiving the highest
examination rating and with an acceptable level of risk, in which case the level
is at least 3%); (3) undercapitalized associations are those that do not meet
regulatory limits, but that are not significantly undercapitalized; (4)
significantly undercapitalized associations have total risk-based capital of
less than 6%, core risk-based capital (consisting only of items that qualify for
inclusion in core capital) of less than 3% or core capital of less than 3%; and
(5) critically undercapitalized associations are those with tangible equity of
less than 2% of total assets. In addition, the OTS generally can downgrade an
association's capital category, notwithstanding its capital level, if, after
notice and opportunity for hearing, the association is deemed to be engaging in
an unsafe or unsound practice because it has not corrected deficiencies that
resulted in it receiving a less than satisfactory examination rating on matters
other than capital or it is deemed to be in an unsafe or unsound condition. An
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such an association will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Furthermore, critically undercapitalized institutions
must be placed in conservatorship or receivership within 90 days of reaching
that capitalization level, except under limited circumstances. Franklin's
capital at December 31, 1998, meets the standards for a well-capitalized
institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized or (b) the amount that is necessary
to bring the association into compliance with all capital standards applicable
to such association at the time the association fails to comply with its capital
restoration plan.
LIQUIDITY. OTS regulations require that savings associations maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, mortgage-backed securities and specified United States Government,
state or federal agency obligations) equal to a monthly average of not less than
4% of its net withdrawable savings deposits plus borrowings payable in one year
or less. Monetary penalties may be imposed upon associations failing to meet
liquidity requirements. The eligible liquidity of Franklin, as computed under
current regulations, at December 31, 1998, was $81.68 million, or 38.27%, and
exceeded the 4.0% liquidity requirement by approximately $73.14 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the Qualified Thrift Lender ("QTL") Test. Prior to September 30, 1996, the QTL
Test required savings associations to maintain a specified level of investments
in assets that are designated as qualifying thrift investments ("QTI"), which
are generally related to domestic residential real estate and manufactured
housing and include stock issued by any FHLB, the FHLMC or the FNMA. Under this
test, 65% of an institution's "portfolio assets" (total assets less goodwill and
other intangibles, property used to conduct business and 20% of liquid assets)
must consist of QTI on a monthly average basis in 9 out of every 12 months.
Congress created a second QTL Test, effective September 30, 1996, pursuant to
which a savings association may also qualify as a QTL thrift if at least 60% of
the institution's assets (on a tax basis) consist of specified assets (generally
loans secured by residential real estate or deposits, educational loans, cash
and certain governmental obligations). The OTS may grant exceptions to the QTL
Test under certain circumstances. If a savings association fails to meet the QTL
Test, the association and its holding company become subject to certain
operating and regulatory restrictions. A savings association that fails to meet
the QTL Test will not be eligible for new FHLB advances. At December 31, 1998,
Franklin met the QTL Test.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the Lending Limit, and the total of such loans cannot exceed the association's
Lending Limit Capital. Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of board of directors of the association with any "interested" director
not participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to
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<PAGE> 24
all employees in a company-wide benefit program. Loans to executive officers are
subject to additional restrictions. Franklin was in compliance with such
restrictions at December 31, 1998.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act ("FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. The
Company is an affiliate of Franklin. Generally, Sections 23A and 23B of the FRA
(i) limit the extent to which a savings association or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such institution's capital stock and surplus, (ii) limit the aggregate of
all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable to the association, as
those provided in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions. In addition to the limits in
Sections 23A and 23B, a savings association may not make any loan or other
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for a bank holding company and may not purchase or invest
in securities of any affiliate except shares of a subsidiary. Franklin was in
compliance with these requirements and restrictions at December 31, 1998.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
to stock form is prohibited from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the net worth of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. OTS
regulations also establish a three-tier system limiting capital distributions
according to ratings of associations based on their capital level and
supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year equal to
the greater of 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its capital requirement for such capital component, as measured at the
beginning of the calendar year, or the amount authorized for a Tier 2
association. A Tier 1 association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3 association. Tier
2 consists of associations that before and after the proposed distribution meet
their current minimum, but not fully phased-in, capital requirements, as such
requirements are defined by OTS regulations. Associations in this category may
make capital distributions of up to 75% of net income over the four most recent
quarters. Tier 3 associations do not meet current minimum capital requirements
and must obtain OTS approval of any capital distribution.
Franklin meets the requirements for a Tier 1 Association and has not
been notified of any need for more than normal supervision. As a subsidiary of
the Company, Franklin is required to give the OTS 30 days notice prior to
declaring any dividend on its common shares. The OTS may object to the dividend
during that 30-day period based on safety and soundness concerns. Moreover, the
OTS may prohibit any capital distribution otherwise permitted by regulation if
the OTS determines that such distribution would constitute an unsafe or unsound
practice. Franklin paid dividends of $1.58 million to the Company during 1998.
HOLDING COMPANY REGULATION. The Company is a unitary savings and loan
holding company within the meaning of the Home Owners' Loan Act (the "HOLA"). As
such, the Company is registered with the OTS and is subject to OTS regulations,
examination, supervision and reporting requirements.
There are generally no restrictions on the activities of unitary
savings and loan holding companies and such companies are the only financial
institution holding companies that may engage in commercial, securities and
insurance activities without limitation. The broad latitude to engage in
activities under current law can be restricted if the OTS determines that there
is reasonable cause to believe that the continuation of an activity by a savings
and loan holding company constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings association. The OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings association, (ii) transactions between
the savings association and its affiliates, and (iii) any activities of the
savings association that might create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to
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<PAGE> 25
permissible business activities of a unitary savings and loan holding company,
if the savings association subsidiary of a holding company fails to meet the QTL
Test, then such unitary holding company would become subject to the activities
restrictions applicable to multiple holding companies. At December 31, 1998,
Franklin met the QTL Test.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
If the Company were to acquire control of another savings institution,
other than through a merger or other business combination with Franklin, the
Company would become a multiple savings and loan holding company. Unless the
acquisition is an emergency thrift acquisition and each subsidiary savings
association meets the QTL Test, the activities of the Company and any of its
subsidiaries (other than Franklin or other subsidiary savings associations)
would thereafter be subject to activity restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof that is not a savings institution shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing or
liquidating assets owned by or acquired from a subsidiary savings institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by federal regulation as of March 5, 1987, to be
engaged in by multiple holding companies, or (vii) those activities authorized
by the FRB as permissible for bank holding companies, unless the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the OTS prior to being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state only if the multiple savings and loan holding company
involved controls a savings association that operated a home or branch office in
the state of the association to be acquired as of March 5, 1987, or if the laws
of the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). The OTS may approve an acquisition resulting in a multiple
savings and loan holding company controlling savings associations in more than
one state in the case of certain emergency thrift acquisitions.
ACQUISITIONS OF CONTROL. Acquisitions of controlling interests of both
Franklin and the Company are subject to limitations in federal and state law.
The federal limitations generally require regulatory approval of acquisitions at
specified levels. State law similarly requires regulatory approval and also
imposes certain anti-takeover limitations.
Pursuant to federal law and regulations, no person, directly or
indirectly, or acting in concert with others, may acquire control of Franklin or
the Company without 60 days prior notice to the OTS. "Control" is generally
defined as having more than 25% ownership or voting power; however, ownership or
voting power of more than 10% may be deemed "control" if certain factors are
present. If the acquisition of control is by a company, the acquiror must obtain
approval, rather than give notice, of the acquisition as a savings and loan
holding company.
Ohio law requires approval by the Superintendent of any acquisition of
control of Franklin directly or indirectly, including through the Company.
Control is deemed to be at least 15% ownership or voting power. Any merger of
Franklin must be approved by the OTS and the Superintendent. Any merger in which
the Company is not the resulting company must also be approved by the OTS and
the Superintendent as a holding company acquisition.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent
federal agency that insures the deposits of federally insured banks and thrifts,
up to prescribed statutory limits, and safeguards the safety and
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soundness of the banking and thrift industries. The FDIC administers two
separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks
and state savings banks and the SAIF for savings associations. Franklin is a
member of the SAIF and its deposit accounts are insured by the FDIC, up to the
prescribed limits. The FDIC has examination authority over all insured
depository institutions, including Franklin, and has authority to initiate
enforcement actions against federally insured savings associations, if the FDIC
does not believe the OTS has taken appropriate action to safeguard safety and
soundness and the deposit insurance fund.
All state-chartered associations are generally limited to activities
and investments of the type and in the amount authorized for federally chartered
associations, notwithstanding state law. The FDIC is authorized to permit such
associations to engage in state-authorized activities or investments that do not
meet this standard if they meet their capital requirements, if it is determined
that such activities or investments do not pose a significant risk to the SAIF.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy banks were reduced significantly below the level
paid by healthy savings associations effective in mid-1995. Federal legislation,
which was effective September 30, 1996, provided for the recapitalization of the
SAIF by means of a special assessment of $.657 per $100 of SAIF deposits held at
March 31, 1995, in order to increase SAIF reserves to the level required by law.
Franklin had $174.2 million in deposits at March 31, 1995 and paid a special
assessment of $1.14 million, which was accounted for and recorded as of
September 30, 1996. BIF assessments for healthy banks in 1998 were $.0122 per
$100 in deposits and SAIF assessments for healthy institutions in 1998 were
$.061 per $100 in deposits.
FRB RESERVE REQUIREMENTS. FRB regulations currently require that
Franklin maintain reserves of 3% of net transaction accounts (primarily NOW
accounts) up to $46.5 million (subject to an exemption of up to $4.9 million),
and of 10% of net transaction accounts in excess of $46.5 million. At December
31, 1998, Franklin was in compliance with its reserve requirements.
FEDERAL HOME LOAN BANKS. The FHLBs provide credit to their members in
the form of advances. Franklin is a member of the FHLB of Cincinnati and must
maintain an investment in the capital stock of that FHLB in an amount equal to
the greater of 1.0% of the aggregate outstanding principal amount of Franklin's
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB. Franklin is in
compliance with this requirement with an investment in stock of the FHLB of
Cincinnati of $1.79 million at December 31, 1998.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
United States Government or an agency thereof; deposits in any FHLB; or other
real estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance. The FHLB has established an "Affordable
Housing Program" to subsidize the interest rate on advances to member
associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. Franklin has participated in this program.
-26-
<PAGE> 27
FEDERAL TAXATION. The Company and Franklin are both subject to the
federal tax laws and regulations which apply to corporations generally. In
addition to the regular income tax, the Company and Franklin may be subject to
an alternative minimum tax. An alternative minimum tax is imposed at a minimum
tax rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions, such as Franklin, were allowed deductions for bad debts
under methods more favorable than those granted to other taxpayers. Qualified
thrift institutions could compute deductions for bad debts using either the
specific charge off method, the "percentage of taxable income" method applicable
only to thrift institutions, or the "experience" method that also was available
to small banks. Under the "percentage of taxable income" method, a thrift
institution generally was allowed a deduction for an addition to its bad debt
reserve equal to 8% of its taxable income (determined without regard to this
deduction and with additional adjustments). Under the experience method, a
thrift institution was generally allowed a deduction for an addition to its bad
debt reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method.
The Small Business Act eliminated the "percentage of taxable income"
method of accounting for bad debts by thrift institutions, effective for taxable
years beginning after 1995. Thrift institutions that are treated as small banks
are allowed to utilize the experience method applicable to such institutions,
while thrift institutions that are treated as large banks are required to use
only the specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Franklin, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that began after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
-27-
<PAGE> 28
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Small Business Act, which requires recapture
in the case of certain excessive distributions to shareholders. The pre-1988
reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (except to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated earnings
and profits; second, out of the pre-1988 reserves; and third, out of such other
accounts as may be proper. To the extent a distribution by Franklin to the
Company is deemed paid out of its pre-1988 reserves under these rules, the
pre-1988 reserves would be reduced and Franklin's gross income for tax purposes
would be increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid out of the pre-1988 reserves. As of December 31, 1998,
Franklin's pre-1988 reserves for tax purposes totaled approximately $3.18
million. Franklin believes it had approximately $7.32 million of accumulated
earnings and profits for tax purposes as of December 31, 1998, which would be
available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation can be made as
to whether Franklin will have current or accumulated earnings and profits in
subsequent years.
The tax returns of Franklin have been audited or closed without audit
through 1994. In the opinion of management, any examination of open returns
would not result in a deficiency which could have a material adverse effect on
the financial condition of Franklin.
OHIO TAXATION. The Company is subject to an Ohio franchise tax based on
the higher of the tax computed on its (1) adjusted net worth or (2) adjusted
federal taxable income.
Franklin is subject to an Ohio franchise tax based on its adjusted net
worth (including certain reserves). The resultant net taxable value of capital
is taxed at a rate of 1.5% for 1998.
DELAWARE TAXATION. As a Delaware corporation, the Company is subject to
an annual franchise tax based on the quantity and par value of its authorized
capital stock and its gross assets. As a savings and loan holding company, the
Company is exempt from Delaware corporate income tax.
-28-
<PAGE> 29
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at December 31,
1998, regarding the properties on which the offices of the Company and Franklin
are located:
<TABLE>
<CAPTION>
Lease Year Gross square
Location Owned or leased expiration date facility opened footage
- -------- --------------- --------------- --------------- -------
<S> <C> <C> <C> <C>
Corporate Office:
- -----------------
4750 Ashwood Drive Owned N/A 1996 19,446
Cincinnati, Ohio 45241
Full Service Branch Offices:
- ----------------------------
45 East Fourth Street Leased 10/99 1992 2,485
Cincinnati, Ohio 45202
2000 Madison Road Owned N/A 1981 2,991
Cincinnati, Ohio 45208
1100 West Kemper Road Leased 4/99 1984 4,080
Cincinnati, Ohio 45240
7615 Reading Road Leased 1/01 1971 2,400
Cincinnati, Ohio 45237
11186 Reading Road Owned N/A 1974 1,800
Cincinnati, Ohio 45241
5015 Delhi Pike Owned 7/10 1976 1,675
Cincinnati, Ohio 45238 (Land is leased)
5119 Glenway Avenue Owned N/A 1974 2,525
Cincinnati, Ohio 45238
</TABLE>
There are no liens on any of the office locations owned by the Company.
The Company believes all office locations are adequately covered by insurance.
At December 31, 1998, the Company's office premises and equipment had a net book
value of $2.04 million. For additional information regarding the Company's
office premises and equipment, see Notes 5 and 13 of Notes to Consolidated
Financial Statements in the Annual Report.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor Franklin is presently involved in any legal
proceedings of a material nature. From time to time, Franklin is a party to
legal proceedings incidental to its business to enforce its security interest in
collateral pledged to secure loans made by Franklin.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in those portions of the Annual Report which
are included in Exhibit 13 under the caption "CORPORATE INFORMATION - Market
Information; and - Dividends" is incorporated herein by reference.
-29-
<PAGE> 30
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The information contained in those portions of the Annual Report which
are included in Exhibit 13 under the caption "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" is incorporated
herein by reference.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements and Notes to Consolidated
Financial Statements contained in those portions of the Annual Report which are
included in Exhibit 13 are incorporated herein by reference.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for the
1999 Annual Meeting of Stockholders of First Franklin Corporation (the "Proxy
Statement") under the captions "Election Of Directors" and "Transactions with
Management and Indebtedness of Management," which is included in Exhibit 20, is
incorporated herein by reference.
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company and
Franklin who do not serve on the Company's Board of Directors. Each officer is
elected annually to serve until his or her successor shall have been elected and
qualified, or until he or she shall resign or be removed by the Board of
Directors. There are no arrangements or understandings between the persons named
and any other person pursuant to which such officers were selected.
DAVID E, HAERR, age 66, joined Franklin in 1998 as Vice President and
Chief Lending Officer. Prior to joining Franklin, Mr. Haerr served as Senior
Vice President in charge of lending at Merchants Bank and Trust in West
Harrison, Indiana. Prior to joining Merchants Bank, he held lending positions at
Fifth Third Bank and Provident Bank.
JOSEPH F. HUTCHISON, age 57, joined the Company and Franklin in 1997 as
Senior Vice President of Corporate Development. Prior to joining the Company,
Mr. Hutchison served as President and CEO of Suburban Federal Savings Bank and
Suburban Bancorporation, Inc., of Cincinnati, Ohio. Mr. Hutchison is currently a
director of the Federal Home Loan Bank of Cincinnati and a trustee of the Ohio
League of Financial Institutions.
GRETCHEN J. SCHMIDT, age 42, has been the Corporate Secretary/Treasurer
of the Company since 1988. She also serves as Vice President of Operations of
Franklin. Ms. Schmidt has held a variety of part-time positions with Franklin
since 1971, and full-time positions since 1978. Ms. Schmidt is the daughter of
President Siemers. Currently, she is responsible for branch operations and
general corporate administration.
DANIEL T. VOELPEL, age 50, has been Vice President/Chief Financial
Officer of the Company since 1988. He also serves as Vice President/Chief
Financial Officer of Franklin and Treasurer of DirectTeller Systems, Inc., and
Franklin's subsidiary, Madison Service Corporation. He has been with Franklin
since 1983.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Executive Compensation" and "Employment Contract," which is included in Exhibit
20, is incorporated herein by reference.
-30-
<PAGE> 31
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"Voting Securities and Principal Holders Thereof" and "Election of Directors,"
which is included in Exhibit 20, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption
"Transactions with Management and Indebtedness of Management," which is included
in Exhibit 20, is incorporated herein by reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a) Certificate of Incorporation of the Company
3(b) Bylaws of the Company
10(a) Employment Contract for Thomas H. Siemers
10(b) First Franklin Corporation 1987 Stock
Option and Incentive Plan
10(c) First Franklin Corporation 1997 Stock
Option and Incentive Plan
13 Portions of the Annual Report to
Stockholders
20 Proxy Statement
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) No report on Form 8-K was filed during the last quarter of
the fiscal year ended December 31, 1998.
-31-
<PAGE> 32
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.
First Franklin Corporation
By: /s/Thomas H. Siemers
-----------------------
Thomas H. Siemers
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By: /s/Thomas H. Siemers By: /s/Daniel T. Voelpel
---------------------------------- -----------------------------
Thomas H. Siemers Daniel T. Voelpel
President, Chief Executive Officer Vice President and Chief
and a Director Financial Officer
(Principal Accounting Officer)
Date: March 22, 1999 Date: March 22, 1999
By: /s/Richard H. Finan By: /s/James E. Cross
---------------------------------- ----------------------------
Richard H. Finan James E. Cross
Director Director
Date: March 22, 1999 Date: March 22, 1999
By: /s/James E. Hoff, S.J. By: /s/John L. Nolting
---------------------------------- -----------------------------
James E. Hoff, S.J. John L. Nolting
Director Director
Date: March 22, 1999 Date: March 22, 1999
-32-
<PAGE> 33
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3(a) Certificate of Incorporation Incorporated by reference to
the Registrant's Form 10-KSB
for the fiscal year ended
December 31, 1996, which was
filed with the Securities and
Exchange Commission on March
31, 1997 (the "1996 Form
10-KSB")
3(b) Bylaws Incorporated by reference to
the Form 10-K filed by the
Registrant with the Securities
and Exchange Commission for
the fiscal year ended December
31, 1992 (the "1992 Form
10-K")
10(a) Employment Contract for Incorporated by reference to
Thomas H. Siemers the Registrant's Registration
Statement on Form S-1 (File
No. 33-17417)
10(b) First Franklin Corporation Incorporated by reference to
1987 Stock Option and the 1992 Form 10-K
Incentive Plan
10(c) First Franklin Corporation Incorporated by reference to
1997 Stock Option and the 1996 Form 10-KSB
Incentive Plan
13 Portions of the Annual Report Included herewith
20 Proxy Statement Included herewith
21 Subsidiaries of First Franklin Included herewith
Corporation
27 Financial Data Schedule Included herewith
-33-
<PAGE> 1
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
First Franklin Corporation ("Company") is a savings and loan holding company
which was incorporated under the laws of the State of Delaware in September 1987
by authorization of the Board of Directors of the Franklin Savings and Loan
Company ("Franklin"). The Company acquired all of the common stock of Franklin
issued in connection with its conversion from the mutual to stock form of
ownership, which was completed on January 25, 1988.
The Company's operating philosophy is to be an efficient and profitable
financial services organization with a professional staff committed to
maximizing shareholder value by structuring and delivering quality services that
attract customers and satisfy their needs and preferences. Management's goal has
been to maintain profitability and a strong capital position. It seeks to
accomplish this goal by pursuing the following strategies: (i) emphasizing
lending in the one to four-family residential mortgage market, (ii) managing
deposit pricing, (iii) controlling interest rate risk, (iv) controlling
operating expenses (v) controlling asset growth, and (vi) maintaining asset
quality.
As a Delaware corporation, First Franklin is authorized to engage in any
activity permitted by the Delaware General Corporation Law. As a unitary savings
and loan holding company, the Company is subject to examination and supervision
by the Office of Thrift Supervision ("OTS"), although the Company's activities
are not limited by the OTS as long as certain conditions are met. The Company's
assets consist of cash, interest earning deposits, and investments in Franklin
and DirectTeller Systems Inc. ("DirectTeller").
Franklin is an Ohio chartered stock savings and loan headquartered in
Cincinnati, Ohio. It was originally chartered in 1883 as the Green Street Number
2 Loan and Building Company. The business of Franklin consists primarily of
attracting deposits from the general public and using those deposits, together
with borrowings and other funds, to originate and purchase investments and real
estate loans for retention in its portfolio and sale in the secondary market.
Franklin operates seven banking offices in Hamilton County, Ohio through which
it offers a full range of consumer banking services, including mortgage loans,
credit and debit cards, checking accounts, auto loans, savings accounts,
automated teller machines and a voice response telephone inquiry system. To
generate additional fee income and enhance the products and services available
to its customers, Franklin also offers annuities, mutual funds and discount
brokerage services in its offices through an agreement with a third party.
Franklin has one wholly-owned subsidiary, Madison Service Corporation
("Madison"). Madison was formed in 1972 to allow Franklin to diversify into
certain types of business which, by regulation, savings and loans were unable to
enter. At the present time, Madison's assets consist solely of cash and
interest-earning deposits. Its only sources of income are the interest earned on
these deposits and the fees received as a result of the agreement with the third
party broker dealer that provides the discount brokerage services at Franklin's
offices.
First Franklin owns 51% of DirectTeller's outstanding common stock. DirectTeller
was formed in 1989 by the Company and DataTech Service, Inc. to develop and
market a voice response telephone inquiry system to allow financial institution
customers to access information about their accounts via the telephone and a
facsimile machine. Franklin currently offers this service to its customers. The
inquiry system is currently in operation at Intrieve Inc., a computer service
bureau which offers the DirectTeller system to the savings and loans it
services. The agreement with Intrieve gives DirectTeller a portion of the
profits generated by the use of the inquiry system by Intrieve's clients.
In September 1997 management and the Board of Directors reviewed the Company's
strategic plan and established the strategic objectives for the next two years.
These objectives include greater emphasis on training, technology, new lending
programs and noninterest income. Many of these objectives were implemented
during 1998.
Since the results of operations of Madison and DirectTeller have not been
material to the operations and financial condition of the Company, the following
discussion focuses primarily on Franklin.
STOCK SPLIT
On April 21, 1998, the Board of Directors announced a three-for-two stock split
payable May 10, 1998 to stockholders of record May 2, 1998. The stock split
increased outstanding common shares from 1,192,029 to 1,788,034. All references
in this Annual Report and the Consolidated Financial Statements and Notes
thereto to number of shares, per share amounts, stock option data and market
price of common shares have been restated giving retroactive recognition to the
stock split.
4
<PAGE> 2
ASSET/LIABILITY MANAGEMENT
Asset/liability management is the process of balancing the risk/return factors
of a variety of financial decisions. Decisions must be made on the appropriate
level of interest rate risk, prepayment risk and credit risk. In addition,
decisions must be made on the pricing and duration of assets and liabilities and
the amount of liquidity. The overall objective of the Company's asset/liability
management policy is to maximize long term profitability and return to its
investors.
The Company's asset/liability management activities are intended to stabilize or
improve earnings in future periods by managing the amount of asset and liability
growth, determining the type and mix of such assets and liabilities, managing
interest rate risk, offering the products and services which meet the needs of
its customers, and analyzing operating costs and efficiencies in order to
institute changes when necessary to increase profitability. Another objective of
asset/liability management is structuring the balance sheet to assist the
Company in maintaining compliance with its regulatory capital requirements and
maintaining investments in certain asset categories within regulatory limits.
Managing interest rate risk is fundamental to banking. Financial institutions
must manage the inherently different maturity and repricing characteristics of
their lending and deposit products to achieve a desired interest rate
sensitivity position and to limit their exposure to changes in interest rates.
Franklin is subject to interest rate risk to the degree that its
interest-bearing liabilities, consisting principally of customer deposits and
Federal Home Loan Bank advances, mature or reprice more or less frequently, or
on a different basis, than from its interest-earning assets, which consist of
mortgage loans, mortgage-backed securities, consumer loans and U.S. Treasury and
agency securities. While having liabilities that mature or reprice more rapidly
than assets may be beneficial in times of declining interest rates, such an
asset/liability structure may have the opposite effect during periods of rising
interest rates. Conversely, having assets that reprice or mature more rapidly
than liabilities may adversely affect net interest income during periods of
declining interest rates. Franklin actively pursues investment strategies to
reduce the sensitivity of its earnings to interest rate fluctuations. These
strategies take into consideration both the variability of rates and the
maturities of various types of investments and deposits. The principal
strategies employed by Franklin to decrease the interest rate risk of its assets
and liabilities have been the origination of adjustable-rate mortgage loans
("ARMs") for its own portfolio, the purchase of adjustable-rate mortgage-backed
securities when market conditions are not favorable for originating ARMs, the
sale of fixed-rate mortgage loans originated, the maintenance of short term
liquid assets at or above required levels and, as market conditions permit, the
lengthening of certificate maturities. At December 31, 1998, ARMs constituted
50.31% of Franklin's loan and mortgage-backed securities portfolio.
Although ARMs and adjustable-rate mortgage-backed securities are more interest
rate sensitive than fixed-rate loans, they are subject to certain limits on the
periodic interest rate adjustments. In a period of rising interest rates, an ARM
could reach a periodic adjustment cap while still at a rate below existing
market rates. Likewise, this cap could limit the downward rate adjustment during
a decline in rates.
The sale of fixed-rate loans originated allows Franklin to maintain an
appropriate level of interest rate sensitivity in its loan portfolio during
times when market conditions are not favorable for originating adjustable-rate
loans. During 1998, interest rates on fixed-rate mortgages remained at the
relatively low levels experienced during 1997, so consumer demand for fixed-rate
mortgages greatly exceeded the demand for adjustable-rate loans. Franklin
originated and sold $17.36 million of fixed-rate one to four-family mortgage
loans during 1998 compared to $11.71 million during 1997. Loans being serviced
for others, mainly the Federal Home Loan Mortgage Corporation, were $55.89
million at December 31,1998 compared to $57.84 million at December 31, 1997.
The Company has an agreement with Student Loan Funding Corporation to sell all
student loans which enter repayment. Sales of $225,900 at a profit of $6,200
occurred during 1998 compared to sales of $354,000 at a profit of $7,300 during
1997.
Franklin's interest rate risk policy, established by the Board of Directors,
requires an estimate of the net portfolio value (the present value of the
interest sensitive assets less the present value of the interest sensitive
liabilities) and projected net interest income under different interest rate
scenarios. Specifically, a projection is made of the net portfolio value ("NPV")
and net interest income that would result from an instantaneous shift in the
Treasury yield curve of plus or minus 100, 200, 300 and 400 basis points. The
interest rate risk policy establishes goals of 3% to 6% for the NPV ratio (NPV
divided by the present value of assets).
The changes in the NPV and net interest income shown in the table below were
calculated using a simulation program. This simulation uses assumptions, which
may or may not prove to be accurate, concerning interest rates, loan prepayment
rates, growth, and the rollover of maturing assets and liabilities consistent
with the current economic environment. These exposure estimates are not exact
measures of Franklin's actual interest rate risk. They are only indicators of
rate risk designed to show a magnified sensitivity to changes in rates.
5
<PAGE> 3
<TABLE>
<CAPTION>
NET INTEREST INCOME NET PORTFOLIO VALUE
------------------- -------------------
CHANGE IN
INTEREST RATES ESTIMATED $ CHANGE % CHANGE ESTIMATED NPV
(BASIS POINTS) $ VALUE FROM CONSTANT FROM CONSTANT $ VALUE RATIO
-------------- ------- ------------- ------------- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400 $5,192 $(1,554) (23.0%) $ 2,894 1.3%
+300 5,698 (1,048) (15.5) 7,202 3.2
+200 6,184 (562) (8.3) 11,361 4.9
+100 6,560 (186) (2.8) 14,772 6.3
0 6,746 0 0.0 17,253 7.2
-100 6,502 (244) (3.6) 16,725 6.8
-200 6,078 (668) (9.9) 15,358 6.3
-300 5,622 (1,124) (16.7) 14,669 5.9
-400 5,339 (1,407) (20.9) 14,942 6.0
</TABLE>
The sensitivity of earnings to interest rate changes is often measured by the
difference, or "gap", between the amount of assets and liabilities scheduled to
reprice within the same period expressed as a percentage of assets, based on
certain assumptions. Generally, the lower the amount of this gap, the less
sensitive are the Company's earnings to interest rate changes. A positive gap
means an excess of assets over liabilities repricing during the same period.
Certain shortcomings are inherent in the method of analysis presented below. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market interest rates.
The table reflects estimates as to the periods to repricing at a particular
point in time. Among the factors considered are current trends and historical
repricing experience with respect to particular or similar products. For
example, savings, money market and NOW accounts may be withdrawn at any time.
Based on historical experience, it is assumed that while all customers in these
account categories could withdraw their funds on any given day, they will not,
even if market interest rates change substantially. The table below sets forth
Franklin's interest rate sensitivity gap as of December 31,1998. As shown below,
the one year cumulative gap is $(8.92) million, or (3.74%). This negative gap
indicates that more liabilities are scheduled to reprice during the next year
than assets. Generally, this would indicate that net interest income would
decrease as rates rise.
<TABLE>
<CAPTION>
3 MONTHS 4 TO 6 7TO12 1 TO 3 3 TO 5 5TO10 10TO20 >20
OR LESS MONTHS MONTHS YEARS YEARS YEARS YEARS YEARS TOTAL
------- ------ ------ ----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Real estate loans;
One to four-family
Adjustable-rate $15,395 $12,752 $ 9,242 $4,137 $0 $0 $ 41,526
Fixed-rate 4,213 3,986 7,338 22,433 $14,445 $17,566 $7,627 $1,222 78,830
Construction loans 4,061 301 349 43 0 0 4,754
Multi-family and non-residential
Adjustable-rate 2,002 1,977 3,881 8,156 0 0 16,016
Fixed-rate 225 218 415 1,415 1,087 1,719 810 5,889
Consumer loans 1,637 118 217 655 209 2,836
Mortgage-backed securities 17,035 16,039 11,889 3,016 2,278 3,560 2,001 55,818
Investments 8,077 25 50 4,773 12,693 1,346 26,964
------- ------- ------- ------- ------- ------- ------- ------ --------
Total rate sensitive assets $52,645 $35,391 $33,356 $39,905 $22,792 $35,538 $11,784 $1,222 $232,633
LIABILITIES:
Fixed maturity deposits $43,444 $41,001 $23,333 $36,719 $ 9,764 $154,261
Transaction accounts 1,574 1,424 2,454 6,099 2,738 $1,929 $ 296 $5 16,519
Money market deposit accounts 611 553 953 2,369 1,063 749 115 2 6,415
Passbook accounts 2,212 2,001 3,449 8,574 3,849 2,712 416 8 23,221
Borrowings 3,300 2,000 2,000 6,000 1,000 197 4,379 0 18,876
------- ------- ------- ------- ------- ------- ------- ------ --------
Total rate sensitive liabilities $51,141 $46,979 $32,189 $59,761 $18,414 $5,587 $5,206 $15 $219,292
GAP INFORMATION:
Cumulative gap $1,504 $(10,084) $(8,917) $(28,773) $(24,395) $5,556 $12,134 $13,341
Cumulative gap as a percentage
of total assets 0.63% (4.23%) (3.74%) (12.07%) (10.24%) 2.33% 5.09% 5.60%
</TABLE>
In preparing the above table, it has been assumed that (i) adjustable-rate one
to four-family residential mortgage loans and mortgage-backed securities with a
current market index (Treasury yields, LIBOR, prime) will prepay at an annual
rate of 25% to 75% (ii) adjustable-rate one to four-family residential mortgage
loans with a lagging market index (cost of funds, national average contract
rate) will prepay at an annual rate of 6% to 25% (iii) fixed-rate one to
four-family residential mortgage loans will prepay at annual rates of 6% to 68%
depending on the stated interest rate and contractual maturity of the loan; (iv)
the decay rate on deposit accounts is 0% to 37% per year; and (v) fixed-rate
certificates of deposit will not be withdrawn prior to maturity.
6
<PAGE> 4
ASSET QUALITY/CREDIT RISK
Credit risk refers to the potential for losses on assets due to a borrower's
default or to the decline in the value of the collateral supporting that asset.
Franklin has taken various steps to reduce credit risk and to maintain the
quality of its assets. The lending program is focused towards relatively low
risk single-family first mortgage loans which are underwritten using standards
acceptable to the Federal Home Loan Mortgage Corporation. As part of an on-going
independent Quality Control program a sample of the loans originated are
reviewed, on a monthly basis, to confirm that underwriting standards have been
followed. The results of these reviews are reported to the Chief Executive
Officer. Franklin closely monitors delinquencies as a means of maintaining asset
quality and reducing credit risk. Collection efforts begin with the delivery of
a late notice fifteen days after a payment is due. All borrowers whose loans are
more than thirty days past due are contacted by the Collection Manager in an
effort to correct the problem.
The Asset Classification Committee meets on a regular basis, at least quarterly,
to determine if all assets are being valued fairly and properly classified for
regulatory purposes. All mortgage loans in excess of $500,000, consumer loans in
excess of $50,000, and repossessed assets are reviewed annually. In addition,
any loan delinquent more than ninety days is reviewed on a quarterly basis.
Other assets are reviewed at the discretion of the committee members.
Non-performing assets include loans which have been placed on non-accrual
status, accruing loans which are ninety days or more past due, repossessed
assets and renegotiated loans. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful or legal action to
foreclose has commenced. In addition, all loans, except one to four-family
residential mortgage loans, are placed on non-accrual status when the
uncollected interest becomes greater than ninety days past due. Consumer loans
more than ninety days delinquent are charged against the consumer loan allowance
for loan losses unless payments are currently being received and it appears
likely that the debt will be collected. Renegotiated loans consist of loans
whose terms have been modified due to the borrowers inability to perform under
the original agreement.
The following table sets forth Franklin's non-performing assets as of the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1998 1997
----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accruing loans $ 585 $ 449
Accruing loans ninety days or
more past due 806 599
Repossessed assets 0 0
Renegotiated loans 244 281
----------- --------
Total non-performing assets $ 1,635 $ 1,329
=========== ========
</TABLE>
As indicated by the table above, non-performing assets increased $306,000 during
1998 due to an increase in the amount of loans accruing but delinquent more than
ninety days. Management does not consider an increase of this level to be an
indication of future problems. During 1999, the Company will continue to monitor
the level of these assets and strive to reduce it.
Franklin maintains an allowance for possible losses on loans and repossessed
assets. The Asset Classification Committee is responsible for maintaining this
allowance at a level sufficient to provide for estimated losses based on known
and inherent risks in the loan portfolio. General reserves are based on the
Committee's continuing analysis of the pertinent factors underlying the quality
of the loan portfolio. These factors include changes in the size and composition
of the loan portfolio, actual loan loss experience, current and anticipated
economic conditions, and detailed analysis of individual loans for which full
collectibility may not be assured.
When available information confirms that specific loans or portions thereof are
uncollectible, these loans are charged-off or specific reserves are established
for the amount of the estimated loss. The existence of some or all of the
following criteria will generally confirm that a loss has been incurred: the
loan is significantly delinquent and the borrower has not evidenced the ability
or intent to bring the loan current; the Company has no recourse to the
borrower, or if it does, the borrower has insufficient assets to pay the debt,
and the fair market value of the loan collateral is significantly below the
current loan balance and there is no near-term prospect for improvement.
7
<PAGE> 5
The following table is an analysis of the loss reserve activity on loans and
repossessed assets during the past two years. In management's opinion, to the
extent that economic and regulatory conditions remain constant, these reserves
are adequate to protect Franklin against reasonably foreseeable losses.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997
-------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Beginning balance $ 1,015 $ 981
Charge-offs
One to four-family 0 24
Multi-family 0 37
Non-residential 0 0
Consumer 0 2
-------------- -----------
0 63
-------------- -----------
Recoveries
One to four-family 1 0
Multi-family 0 0
Non-residential 0 0
Consumer 2 13
-------------- -----------
3 13
-------------- -----------
Net charge-offs (recoveries) (3) 50
Additions charged to operations 74 84
-------------- -----------
Ending balance $ 1,092 $ 1,015
============== ===========
Ratio of net charge-offs (recoveries) to
average loans outstanding (0.002%) 0.03%
============== ===========
Ratio of net charge-offs (recoveries) to
average non-performing assets (0.20%) 3.84%
============== ===========
</TABLE>
RESULTS OF OPERATIONS
Net income for 1998 was $1.83 million. This represents a 0.78% return on average
assets and a 8.62% return on average stockholders' equity. Book value per share
at December 31, 1998 was $12.29. Net Income for the year ended December 31, 1997
was $1.69 million. The returns on average assets and average equity for 1997
were 0.74% and 8.24%, respectively. During 1996 Franklin experienced two
extraordinary non-recurring charges against operations; a $1.14 million
assessment to recapitalize the Savings Association Insurance Fund ("SAIF") and a
$571,000 charge related to the termination of the Company's defined benefit
pension plan. Excluding these charges, net income for the year ended December
31, 1996 was $1.43 million, which represents a return on average assets of 0.66%
and a return on average stockholders' equity of 7.04%. Net income, after the
non-recurring charges, for the year ended December 31,1996 was $274,000, which
represents a return on average assets of 0.13% and a return on average
stockholders' equity of 1.35%.
NET INTEREST INCOME. Net interest income, the difference between interest
earned on interest-earning assets and the interest paid on interest-bearing
liabilities, is the Company's primary source of earnings. The amount of net
interest income depends on the volume of interest-earning assets and
interest-bearing liabilities and the level of rates earned or paid on those
assets or liabilities. The following table presents the interest income earned
on average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities and their resultant
costs. Average balances shown are the average of the month end balances for each
category. Non-accruing loans have been included as loans carrying a zero yield,
and the unrealized gain or loss on available-for-sale securities has been
excluded from the calculation of the average outstanding balance. The table
indicates that net interest income declined slightly during 1998 to $5.90
million from $5.97 million in 1997 due to a decrease in the interest rate spread
from 2.36% for 1997 to 2.23% for 1998.
8
<PAGE> 6
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ------------------------------ ---------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
-------- ------- ---- -------- ------- ---- -------- ------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable (1) $151,989 $11,895 7.83% $153,130 $12,157 7.94% $146,122 $11,747 8.04%
Mortgage-backed securities(2) 40,854 2,408 5.89 36,906 2,489 6.74 39,976 2,648 6.62
Investments (2) 32,985 2,164 6.56 28,974 1,701 5.87 23,060 1,269 5.50
FHLB stock 1,758 126 7.17 1,757 126 7.17 1,689 118 6.99
-------- ------- -------- ------- -------- ------- ----
Total interest-earning
assets $227,586 $16,593 7.29 $220,767 $16,473 7.46 $210,847 $15,782 7.49
======== ======= ======== ======= ======== ======= ====
INTEREST-BEARING LIABILITIES:
Demand and NOW accounts $ 22,256 $ 473 2.13 $ 23,202 $ 494 2.13 $ 23,709 $ 528 2.23
Savings deposits 22,485 620 2.76 22,799 631 2.77 24,721 683 2.76
Certificate accounts 157,401 9,085 5.77 153,662 8,982 5.85 139,800 8,115 5.80
FHLB advances 9,050 512 5.66 6,119 395 6.46 7,090 459 6.47
-------- ------- -------- ------- -------- ------- ----
Total interest-bearing
liabilities $211,192 $10,690 5.06 $205,782 $10,502 5.10 $195,320 $ 9,785 5.01
======== ======= ======== ======= ======== ======= ====
Net interest income $ 5,903 $ 5,971 $ 5,997
======= ======= =======
Net interest rate spread 2.23% 2.36% 2.48%
===== ===== =====
Net earning assets $ 16,394 $ 14,985 $ 15,527
======== ======== ========
Net yield on average
interest-earning assets 2.59% 2.70% 2.84%
===== ===== =====
Average interest-earning
assets to average
interest-bearing liabilities 1.08% 1.07% 1.08%
======= ======= =======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Investments classified as available-for-sale included at
amortized cost not fair value.
RATE/VOLUME ANALYSIS. The most significant impact on the Company's net interest
income between periods relates to the interaction of changes in the volume of
and rates earned or paid on interest-earning assets and interest-bearing
liabilities. The following rate/volume analysis describes the extent to which
changes in interest rates and the volume of interest related assets and
liabilities have affected net interest income during the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities, the
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year's rate), (ii) changes in rate (change in rate
multiplied by prior year's volume) and (iii) total changes in rate and volume.
The combined effect of changes in both rate and volume, which cannot be
separately identified, has been allocated proportionately to the change due to
volume and the change due to rate.
During 1998, net interest income decreased $68,000 compared to a $26,000
decrease during 1997. Total interest income increased $120,000, due to an
increase in the average amount of interest-earning assets of $6.82 million which
offset a decline in the rates earned on total interest-earning assets from 7.46%
to 7.29%. The decrease in the average yield reflects a decline in the yield on
loans receivable and mortgage-backed securities. During the same period,
however, interest expense increased $188,000 due to an increase in average
interest-bearing liabilities of $5.41 million, which offset a decrease in the
average cost of funds from 5.10% to 5.06%. The reduction in the average cost of
funds reflects a decline in the cost of certificates from 5.85% to 5.77% and a
decline in the cost of FHLB advances from 6.46% to 5.66%.
<TABLE>
<CAPTION>
1998 vs 1997 1997 vs 1996 1996 vs 1995
------------ ------------ ------------
INCREASE INCREASE INCREASE
(DECREASE) TOTAL (DECREASE) TOTAL (DECREASE) TOTAL
DUE TO INCREASE DUE TO INCREASE DUE TO INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
--------- -------- ------- --------- --------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ATTRIBUTABLE TO: (Dollars in thousands)
Loans receivable (1) $ (90) $ (172) $ (262) $ 554 $ (144) $ 410 $ 901 $ (40) $ 861
Mortgage-backed securities 455 (536) (81) (208) 49 (159) 213 165 378
Investments 250 213 463 343 89 432 81 (94) (13)
FHLB stock 5 3 8 6 3 9
--------- -------- ----- -------- --------- ----- --------- ------ -------
Total interest-earning assets $ 615 $ (495) $ 120 $ 694 $ (3) $ 691 $ 1,201 $ 34 $ 1,235
========= ======== ===== ======== ========= ===== ========= ====== =======
INTEREST EXPENSE ATTRIBUTABLE
TO:
Demand and NOW accounts $ (20) $ (1) $ (21) $ (11) $ (23) $ (34) $ (6) $ (52) $ (58)
--------- -------- ----- -------- --------- ----- --------- ------ -------
Savings accounts (9) (2) (11) (54) 1 (53) (29) (4) (33)
Certificate accounts 213 (110) 103 810 58 868 627 (22) 605
FHLB advances 158 (41) 117 (63) (1) (64) 298 8 306
--------- -------- ----- -------- --------- ----- --------- ------ -------
Total interest-bearing
liabilities $ 342 $ (154) $ 188 $ 682 $ 35 $ 717 $ 890 $ (70) $ 820
========= ======== ===== ======== ========= ===== ========= ====== =======
Increase (decrease) in
net interest income $ 273 $ (341) $ (68) $ 12 $ (38) $ (26) $ 311 $ 104 $ 415
========= ======== ===== ======== ========= ===== ========= ====== =======
(1) Includes non-accruing loans.
</TABLE>
9
<PAGE> 7
AVERAGE YIELDS AND RATES PAID. The following table sets forth the average yields
earned on loans and other investments and the average rate paid on savings
accounts and borrowings and the interest rate spread at the end of each of the
past three years.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable (1) 7.57% 7.84% 7.72%
Mortgage-backed securities 6.18 6.84 6.72
Investments (2) 5.82 6.41 5.55
FHLB stock 7.00 7.25 7.00
---- ---- ----
Combined weighted average yield on
Interest-earning assets 7.03 7.46 7.28
---- ---- ----
Weighted average rate paid on:
Demand and NOW deposits 2.09 2.22 2.25
Savings deposits 2.75 2.75 2.75
Certificates 5.47 5.74 5.68
Borrowings 5.30 6.45 6.46
---- ---- ----
Combined weighted average rate paid
on interest-bearing liabilities 4.79 5.05 4.93
---- ---- ----
Interest rate spread 2.24% 2.41% 2.35%
===== ===== =====
</TABLE>
(1) Includes impact of non-accruing loans.
(2) Yields reflected have not been calculated on a tax equivalent basis.
PROVISION FOR LOAN LOSSES. Management determines the amount of the loan loss
provisions to be expensed each year based on previous loan loss experience,
current economic conditions, the composition of the loan portfolio and the
current level of loan loss reserves. Charges against current operations during
1998, 1997 and 1996 for loan loss reserves were $73,500, $84,000 and $91,900,
respectively. During 1998 assets classified as substandard and loss increased
14.0% to $1.71 million and non-performing assets increased by 23.02% to $1.64
million. Management does not believe that the increase in non-performing assets
is an indication of a possible increase in losses in the near future, therefore,
the charges against current operations during 1998 were decreased from 1997
levels. It is management opinion that the level of reserves at December 31, 1998
is adequate to protect Franklin against reasonably foreseeable losses.
The foregoing statement is a "forward looking" statement within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended. Factors that could affect the adequacy of
the reserve for loan losses include, but are not limited to, the following: (1)
changes in the local and national economy which may negatively impact the
ability of borrowers to repay their loans and which may cause the value of real
estate and other properties that secure outstanding loans to decline; (2)
unforeseen adverse changes in circumstances with respect to certain large
borrowers; (3) decrease in the value of collateral securing consumer loans to
amounts equal to or less than the outstanding balances of the loans; and (4)
determinations by various regulatory agencies that Franklin must recognize
additions to its provision for loan losses based on such regulators' judgement
of information available to them at the time of their examinations.
NONINTEREST INCOME. Noninterest income was $1.12 million for 1998, compared to
$618,000 for 1997 and $544,000 for 1996. Current year income included profits of
$303,000 on the sale of mortgage and student loans, profits on the sale of
investments of $247,000, service fees of $236,000 earned on checking and money
market accounts, $8,000 in income from Madison and $35,000 in income from
DirectTeller. Profits on the sale of loans and investments were $216,000 in 1997
and $125,000 in 1996. Noninterest income during 1997 and 1996 included service
fees on checking and money market accounts of $198,000 and $209,000,
respectively.
NONINTEREST EXPENSE. Noninterest expense was $4.21 million, $4.02 million and
$6.04 million for the years ended December 31, 1998, 1997 and 1996,
respectively. 1996 expenses included one-time extraordinary charges of $1.14
million to recapitalize the SAIF insurance fund and $571,000 related to the
termination of the Company's defined benefit pension plan. As a percentage of
average assets, total noninterest expenses were 1.80%, 1.76%, and 2.78% for the
three years. Noninterest expense, excluding the two extraordinary charges, as a
percentage of average assets for 1996 was 1.99%. The following table shows the
major noninterest expense items and their percent of change during 1998 and
1997.
10
<PAGE> 8
<TABLE>
<CAPTION>
PERCENT PERCENT
INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------------ ------ --------------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Compensation $ 1,594 8.6% $ 1,468 3.2% $ 1,423
Employee benefits 332 (1.2) 336 4.3 322
Termination of pension plan 571
Office occupancy 651 9.4 595 (2.6) 611
FDIC insurance 124 22.8 101 (76.5) 430
SAIF assessment 1,144
Data processing 239 6.2 225 (11.8) 255
Marketing 111 16.8 95 (4.0) 99
Professional fees 106 (36.5) 167 (26.8) 228
Supervisory expense 98 (4.9) 103 6.2 97
Taxes, other than income 205 4.1 197 (7.1) 212
Other 750 0.3 729 12.2 650
------------ ------ --------------- ------- ----------
TOTAL S 4,210 4.8% $ 4,016 (33.5)% $ 6,042
============ ====== =============== ======= ==========
</TABLE>
Under Statement of Financial Accounting Standards (SFAS) No. 91 certain loan
costs can be capitalized against specific loans thus reducing compensation
expense. These capitalized costs were $243,000, $157,000 and $152,000 during
1998, 1997 and 1996, respectively. The increase in occupancy expense reflects
increased maintenance costs at the corporate office resulting from the leasing
of the second floor. The reduction in professional fees reflects a decline in
legal and investment banking charges. Compensation increased due to an increase
in personnel. The increase in marketing expense reflects the cost of developing
and promoting new loan products.
In 1995 the Board of Directors decided to terminate the Company's defined
benefit pension plan effective February 15, 1996. During the fourth quarter of
1996, the Internal Revenue Service approved the termination of the plan and the
settlement of the vested benefit obligation, by lump sum payments to all covered
employees, was completed during early 1997. As a result of the termination of
this plan, the Company recognized a settlement loss of approximately $571,000
during 1996. The terminated plan has been replaced with a defined contribution
plan requiring the Company to annually contribute ten percent of compensation
for all covered participants. It is anticipated that the Company's annual
contribution to the new defined contribution plan will be approximately equal to
the annual contribution which was made to the terminated defined benefit plan.
PROVISION FOR FEDERAL INCOME TAXES. Provisions for federal income taxes were
$909,148, $800,482, and $133,342 in fiscal 1998, 1997 and 1996, respectively.
The effective federal income tax rates for the years ended December 31, 1998,
1997, and 1996 were 33.2%, 32.2% and 32.8%, respectively. A reconciliation of
statutory federal income tax rates to the effective federal income tax rates is
shown in Note 11 of the Notes to Consolidated Financial Statements.
LIQUIDITY
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings withdrawals and pay
operating expenses. All financial institutions must manage their liquidity to
meet anticipated funding needs at a reasonable cost and have contingency plans
to meet unanticipated funding needs or the loss of a funding source. The
Company's liquid assets consist of cash, cash equivalents and investment
securities available for sale. Liquid assets decreased $8.32 million to $27.49
million at December 31, 1998.
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
requires the Company to classify certain investments in debt and equity
securities as held-to-maturity, available-for-sale or held in a trading account.
Currently, most adjustable-rate mortgage-backed securities, municipal bonds and
U.S. Government and agency securities are classified as available-for-sale, and
certificates of deposit and fixed-rate mortgage-backed securities are classified
as held-to-maturity. No investments are classified as trading. All new
investments are evaluated at the time of purchase to determine how they should
be classified. At December 31,1998 the Company had a $ 144,000 unrealized gain
on investments and mortgage-backed securities classified as available-for-sale.
During 1998 the Company sold $21.30 million of available-for-sale agency and
mortgage-backed securities at profits of $247,000. Proceeds from the sales were
reinvested in adjustable-rate mortgage-backed securities. The agency securities
were sold because they had call provisions which most likely would be exercised
in the near future. In 1997, the Company sold $9.98 million of available-for-
sale agency securities having an average yield of 5.69%, at a net loss of
$15,000. These were replaced with $10.0 million of agency securities maturing in
ten years and having an average yield of 7.06%.
The change in cash and cash equivalents is caused by one of three activities:
operations, investing or financing. These activities are summarized below for
the years ended December 31,1998 and 1997.
11
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
-------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income $ 1,833 $ 1,688
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities (776) 110
-------------- ------------
Net cash provided by operating activities 1,057 1,798
Net cash used in investing activities (7,075) (12,023)
Net cash provided by financing activities 8,397 6,206
-------------- ------------
Net increase (decrease) in cash and cash equivalents 2,379 (4,019)
Cash and cash equivalents at beginning of year 5,990 10,009
-------------- ------------
Cash and cash equivalents at end of year $ 8,369 $ 5,990
============== ============
</TABLE>
Operating activities include the sale of fixed-rate single family mortgage loans
of $17.36 million during 1998 and $11.71 million during 1997. The Company
attempts to sell, in the secondary market, eligible fixed-rate single-family
mortgage loans originated and any adjustable-rate loans exercising their
conversion privilege.
Loan receipts and disbursements are a major component of the Company's investing
activities. Repayments on loans and mortgage-backed securities during the year
ended December 31,1998 totaled $59.87 million compared to $39.29 million during
1997. Loan disbursements, including loans originated for sale, during 1998 were
$60.74 million compared to $48.02 million during 1997. The increase in loan
repayments and disbursements during 1998 reflects an increase in loan
refinancings due to lower interest rates. The Company also purchased $40.91
million of mortgage-backed securities during 1998 and $2.55 million during 1997.
Investment securities of $31.42 million were purchased during 1998. Maturities
and sales of investment securities during the same period totaled $42.22
million. This compares to purchases of $35.14 million and maturities or sales of
$22.82 million during 1997.
Financing activities include deposit account flows, the use of borrowed funds
and the payment of dividends. Deposits increased $55,000 to $202.26 million at
December 31,1998 from $202.21 million at December 31,1997. Net of interest
credited, deposits decreased by $8.96 million during 1998 as compared to a $1.50
million decrease during 1997. The table below sets forth the deposit flows by
type of account, including interest credited, during 1998 and 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997
----------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Passbook savings $ 666 $ (1,573)
NOW / Super NOW accounts 3,245 (142)
MMDA accounts (1,263) (2,005)
----------------- ----------------
Total 2,648 (3,720)
----------------- ----------------
Certificates:
7-31 day 101 (382)
91 day 117 (39)
Six month 3,149 3,311
One year (14,419) 8,124
Eighteen month 4,301 (1,862)
Two year 4,208 9,542
Thirty-two month 0 (14)
Three year 3,835 (6,261)
Five year (4,684) (1,424)
Jumbo certificates 965 499
Other (166) (216)
----------------- ----------------
Total (2,593) 11,27
----------------- ----------------
Total deposit increase $ 55 $ 7,558
================= ================
</TABLE>
12
<PAGE> 10
At December 31,1998 Franklin had outstanding Federal Home Loan Bank ("FHLB")
advances of $15.58 million. The following table lists those advances by maturity
date:
<TABLE>
<CAPTION>
MATURITY INTEREST OUTSTANDING
DATE RATE BALANCE
- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C>
05/01/06 8.15% $ 197
06/17/08 5.10 2,000
06/18/08 5.38 2,000
09/08/08 4.80 2,000
10/02/08 4.82 1,000
11/06/08 4.64 2,000
11/10/08 4.25 2,000
10/01/10 6.35 3,120
12/01/10 6.30 1,259
-------
$15,576
=======
</TABLE>
Subject to certain limitations, based on its current investment in FHLB stock,
Franklin is eligible to borrow an additional $20.20 million from the FHLB.
The OTS requires minimum levels of liquid assets ranging between four and ten
percent. Current OTS regulations require Franklin to maintain liquid assets
(U.S. Treasury and federal agency securities, mortgage-backed securities and
other investments) equal to at least 4% of the sum of its net deposit accounts
and borrowing payable in one year or less. At December 31,1998, Franklin's
regulatory liquidity was 38.27%.
At December 31, 1998 Franklin had outstanding commitments to originate or
purchase $4.11 million of mortgage loans or mortgage-backed securities, as
compared to $1.95 million at December 31, 1997. During the next twelve months
approximately $107.78 million of certificates of deposit are scheduled to
mature. Based on past history, it can be anticipated that the majority of the
maturing certificates will either be renewed or transferred to other Franklin
accounts. Management believes that the Company has sufficient cash flow and
borrowing capacity to meet these commitments and maintain desired liquidity
levels.
CAPITAL
The Company's capital supports business growth, provides protection to
depositors, and represents the investment of stockholders on which management
strives to achieve adequate returns. The capital adequacy objectives of the
Company have been developed to meet these needs. These objectives are to
maintain a capital base reasonably commensurate with the overall risk profile of
the Company, to maintain strong capital ratios, and to meet all regulatory
guidelines. Management believes that a strong capital base is instrumental in
achieving enhanced stockholder returns over the long term.
The Company's stockholders' equity decreased approximately $290,000 during 1998
from $21.23 million at December 31,1997 to $20.94 million at the end of 1998.
Book value per share increased to $12.29 at December 31, 1998 from $11.87 at the
end of 1997. The decrease in stockholders' equity is primarily the result of net
income for the year of $1.83 million offset by a decrease in unrealized gains on
available-for -sale securities of $325,000, dividends declared of $509,000 and
purchases of treasury stock of $1.29 million. As a percentage of total assets,
the Company's stockholders' equity equaled 8.71% and 9.21% of total assets at
December 31,1998 and 1997, respectively.
Dividends per share of $0.292 and $0.24 were declared in 1998 and 1997,
respectively, resulting in payments of $509,000 in 1998 and $428,000 in 1997.
See Note 8 of the Notes to Consolidated Financial Statements for information
regarding regulatory restrictions on dividend payments from Franklin Savings to
the Company.
For regulatory purposes, Franklin is subject to a leverage ratio (core capital)
and a risk-based capital requirement. The following table summarizes Franklin's
current regulatory capital position:
<TABLE>
<CAPTION>
CAPITAL STANDARD ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
------ -------- ------ ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Core $15,361 $ 9,525 $ 5,836 6.45% 4.00% 2.45%
Risk-based 16,091 8,436 7,655 15.26 8.00 7.26
</TABLE>
13
<PAGE> 11
YEAR 2000 ISSUES
As with all financial institutions, Franklin's operations depend almost entirely
on computer systems. Franklin has addressed the potential problems associated
with the possibility that the computers which control or operate Franklin's
operating systems, facilities and infrastructure may not be programmed to read
four-digit date codes and, upon arrival of the year 2000, may recognize the
two-digit code "00" as the year 1900, causing systems to fail to function or to
generate erroneous data.
Franklin has developed a five stage action plan which assesses the magnitude of
the Year 2000 problem, provides a strategy that minimizes the impact of these
problems, develops contingency plans to be implemented if critical systems do
not become Year 2000 compliant and develops testing procedures to insure that
systems are Year 2000 compliant. The status of this effort is reported to the
Board of Directors on a regular basis. The Company's technology committee meets
on a quarterly basis to monitor the progress being made and address any
concerns. The awareness, assessment and renovation phases of this plan are
substantially complete and the validation phase is scheduled for completion by
the end of the first quarter of 1999.
All third party providers of software have either certified their product as
compliant or have indicated that they will be compliant by the end of the first
quarter of 1999. The major provider of data processing services to Franklin has
completed its migration to a Year 2000 ready platform operating system and data
base. Customer transaction and communications testing were completed during the
fourth quarter of 1998 with no significant problems. All computer equipment has
been tested for Year 2000 compliance and any necessary replacements have been
made.
Franklin has not identified any significant expenses which are reasonably likely
to be incurred in future periods in connection with this issue and does not
expect to incur significant expense to implement any necessary corrective
actions. No assurance can be given, at this time, that significant expense will
not be incurred in future periods. In the unlikely event that Franklin is
ultimately required to purchase replacement computer systems, programs and
equipment, or that substantial expense must be incurred to make Franklin's
current systems, programs and equipment Year 2000 compliant, Franklin's net
income and financial condition could be adversely affected.
In addition to possible expense related to its own systems, Franklin could incur
losses if loan payments are delayed due to Year 2000 problems affecting any of
its significant borrowers or impairing the payroll systems of large employers in
Franklin's primary market area. Because Franklin's loan portfolio is highly
diversified with regard to individual borrowers and types of businesses and its
primary market area is not significantly dependent upon one employer or
industry, Franklin does not expect any significant or prolonged difficulties
that could affect net earnings or cash flow.
FUTURE ACCOUNTING ISSUES
The following represent accounting pronouncements which were adopted by the
Company during the current year or must be adopted by the Company in future
years in order to be in compliance with Generally Accepted Accounting
Principles.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and other Postretirement Standards". This statement is effective for
fiscal years beginning after December 15, 1997. Restatement of comparative
period disclosures is required unless the information is not readily available,
in which case the notes to the financial statements shall include all available
information and a description of the information not available. This statement
standardizes the disclosure requirements of SFAS No. 87 and No. 106 to the
extent practicable and recommends a parallel format for presenting information
about pensions and other postretirement benefits. Statement 132 does not change
any of the measurement or recognition provisions provided for in SFAS No. 87,
No. 88 or No. 106. The adoption of this standard did not have an effect on the
company's consolidated financial condition or results of operations.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which establishes standards for derivative instruments, including
derivative instruments imbedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management is currently assessing the impact that
adoption of this standard will have on the Company's financial statements.
CORPORATE INFORMATION
MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market and is
quoted on The Nasdaq National Market under the trading symbol "FFHS". As of
February 26,1999 there were approximately 421 stockholders of record, not
including those persons whose shares are held in nominee or street name through
various brokerage firms or banks.
14
<PAGE> 12
The following table sets forth the high and low sales prices for the Company's
common stock as reported on The Nasdaq National Market during the quarters
indicated. At February 26,1999 First Franklin's closing sale price as reported
on The Nasdaq National Market was $13.75
<TABLE>
<CAPTION>
STOCK PRICES
QUARTER ENDED: LOW HIGH
------ ------
<S> <C> <C>
March 31,1997 $10.67 $12.50
June 30,1997 11.33 13.83
September 30,1997 13.17 16.00
December 31,1997 15.00 20.83
March 31,1998 17.17 20.00
June 30,1998 14.25 22.00
September 30,1998 12.50 16.63
December 31,1998 12.00 15.63
</TABLE>
DIVIDENDS
Dividends are paid upon the determination of the Board of Directors that such
payment is consistent with the short-term and long-term interests of the
Company. The factors affecting this determination include the Company's current
and projected earnings, operating results, financial condition, regulatory
restrictions, future growth plans and other relevant factors. The Company
declared dividends of $0.292 per share during 1998 and $0.24 per share during
1997.
The principal source of earnings for the Company on an unconsolidated basis is
dividends paid by Franklin. Franklin may not declare or pay a cash dividend to
the Company or repurchase shares of its stock from the Company if the effect
thereof would be to cause its regulatory capital to be reduced below the amount
required for the liquidation account established by Franklin in connection with
the Conversion or to meet applicable regulatory capital requirements. Federal
regulations limit Franklin's capital distributions during a calendar year to one
hundred percent of its net income plus one-half of its capital surplus ratio at
the beginning of the calendar year. In addition, Franklin must give the OTS
thirty days notice prior to the declaration of a dividend to the Company. During
1998, Franklin paid approximately $1.58 million in dividends to the Company
compared to $277,000 during 1997. These dividend payments represented
approximately ninety percent of Franklin's net income for 1998 and eight percent
of 1997 net income. There is no federal regulatory restriction on the payment of
dividends by the Company. However, the Company is subject to the requirements of
Dela-ware law which generally limit dividends to an amount equal to the excess
of a corporation's net assets over paid in capital; or if there is no such
excess, to its net profits for the current and immediately preceding fiscal
year.
TRANSFER AGENT:
Fifth Third Bank, Cincinnati, Ohio
SPECIAL COUNSEL:
Vorys, Sater, Seymour and Pease, Cincinnati, Ohio
ANNUAL MEETING:
The Annual Meeting of Stockholders will be held at the corporate office of the
Company located at 4750 Ashwood Drive, Cincinnati, Ohio, on April 26,1999 at
3:00 P.M.
FORM 10-KSB:
The Company's 1998 Annual Report on Form 10-KSB as filed with the Securities and
Exchange Commission will be furnished without charge to any shareholder who
contacts:
Investor Relations Department
First Franklin Corporation
4750 Ashwood Drive
P.O. Box 415739
Cincinnati, Ohio 45241
15
<PAGE> 13
CLARK, SCHAEFER, HACKETT & CO.
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
First Franklin Corporation and Subsidiary
We have audited the consolidated balance sheets of First Franklin Corporation
and Subsidiary as of December 31, 1998 and 1997 and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Franklin
Corporation and Subsidiary as of December 31, 1998 and 1997 and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/ss/ Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
January 29, 1999
16
<PAGE> 14
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash, including certificates of deposit and other
interest-earning deposits of $8,060,000 and $3,380,000
at December 31, 1998 and 1997, respectively $ 8,369,318 $ 5,990,285
Investment securities:
Securities available-for-sale, at market value (amortized
cost of $19,041,099 and $29,739,650 at December 31, 1998
and 1997 respectively) 19,125,146 29,828,885
Mortgage-backed securities:
Securities available-for-sale, at market value (amortized
cost of $43,462,293 and $18,208,117 at December 31, 1998
and 1997 respectively) 43,522,235 18,754,756
Securities held-to-maturity, at amortized cost (market value
of $12,468,794 and $17,165,299 at December 31, 1998
and 1997, respectively) 12,355,168 17,158,164
Loans receivable, net 150,179,277 152,752,985
Real estate owned, net
Investment in Federal Home Loan Bank
of Cincinnati stock, at cost 1,788,700 1,808,800
Accrued interest receivable:
Investment securities 267,059 394,783
Mortgage-backed securities 315,750 210,000
Loans receivable 804.341 828,398
Property and equipment, net 2,038,783 1,979,651
Other assets 1,549,036 797,049
------------- -------------
$ 240,314,813 $ 230,503,756
============= =============
LIABILITIES
Savings accounts $ 202,261,392 $ 202,206,185
Federal Home Loan Bank advances 15,575,801 5,461,995
Advances by borrowers for taxes and insurance 1,091,360 1,067,270
Other liabilities 445,150 540,393
------------- -------------
Total liabilities $ 219,373,703 $ 209,275,843
------------- -------------
Commitments (Notes 13 and 15)
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value, 500,000 shares
authorized, none issued and outstanding
Common stock - $.01 par value, 2,500,000 shares
authorized, 2,010,867 shares Issued in 1998 and 1997. 13,406 13,406
Additional paid-in capital 6,189,237 6,189,514
Treasury stock, at cost - 306,494 and 222,832 shares
in 1998 and 1997, respectively (2,630,422) (1,343,770)
Retained earnings, substantially restricted 17,273,849 15,949,064
Accumulated other comprehensive income:
Unrealized gain on available-for-sale securities,
net of taxes of $48,950 and $216,200 at
December 31, 1998 and 1997, respectively 95,040 419,699
------------- -------------
Total stockholders' equity 20,941,110 21,227,913
------------- -------------
$ 240,314,813 230,503,756
============= =============
</TABLE>
See accompanying notes to financial statements.
17
<PAGE> 15
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996
-------------------- ---------------- ---------------------
<S> <C> <C> <C>
Interest income
Loans receivable $ 11,894,693 $ 12,156,897 $ 11,746,620
Investment securities 1,888,477 1,468,581 1,167,095
Mortgage-backed securities 2,407,935 2,489,398 2,648,299
Other interest income 401,906 358,002 219,458
-------------------- ---------------- ---------------------
16,593,011 16,472,878 15,781,472
-------------------- ---------------- ---------------------
Interest expense:
Savings accounts 10,178,360 10,106,866 9,325,910
Borrowed funds 511,986 395,207 458,867
-------------------- ---------------- ---------------------
10,690,346 10,502,073 9,784,777
-------------------- ---------------- ---------------------
NET INTEREST INCOME 5,902,665 5,970,805 5,996,695
Provision for loan losses 73,500 84,000 91,900
-------------------- ---------------- ---------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,829,165 5,886,805 5,904,795
-------------------- ---------------- ---------------------
Noninterest income:
Service fees on NOW accounts 235,653 198,120 208,912
Gain on loans sold 302,727 215,758 73,446
Gain on sale of investments 247,289 51,376
Other income 338,021 204,240 210,408
-------------------- ---------------- ---------------------
1,123,690 618,118 544,142
-------------------- ---------------- ---------------------
Noninterest expense:
Salaries and employee benefits 1,925,512 1,804,314 1,744,725
Occupancy 650,906 594,557 611,303
Federal deposit insurance premiums 124,398 101,098 1,574,041
Service bureau 238,584 225,237 255,613
Taxes other than income taxes 204,711 196,734 212,012
Loss on sale of investment securities 13,465
Other 1,066,224 1,080,762 1,073,399
Termination of pension plan 570,732
-------------------- ---------------- ---------------------
4,210,335 4,016,167 6,041,825
-------------------- ---------------- ---------------------
INCOME BEFORE FEDERAL INCOME TAXES 2,742,520 2,488,756 407,112
Provision for federal income taxes 909,148 800,482 133,342
-------------------- ---------------- ---------------------
NET INCOME $ 1,833,372 $ 1,688,274 $ 273,770
==================== ================ =====================
NET INCOME PER COMMON SHARE
Basic $ 1.05 $ 0.95 $ 0.16
==================== ================ =====================
Diluted $ 1.05 $ 0.92 $ 0.15
==================== ================ =====================
</TABLE>
See accompanying notes to financial statements.
18
<PAGE> 16
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996
--------------- ---------------- ------------------
<S> <C> <C> <C>
Net Income $ 1,833,372 $ 1,688,274 $ 273,770
Other comprehensive income, net of taxes
Unrealized gains (losses) on available-for-sale securities
Unrealized holding gains (losses) during the year (161,448) 193,297 95,191
Less: Reclassification adjustment for (gains)
losses included in net income (163,211) 8,887
--------------- ---------------- ------------------
COMPREHENSIVE INCOME $ 1,508,713 $ 1,890,458 $ 368,961
=============== ================ ==================
</TABLE>
See accompanying notes to financial statements.
19
<PAGE> 17
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL GAIN(LOSS) ON
COMMON PAID-IN TREASURY AVAILABLE-FOR-SALE RETAINED
STOCK CAPITAL STOCK SECURITIES EARNINGS
------------- -------------- ------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1995 $ 12,702 $ 5,838,118 $ (442,045) $ 122,324 $ 14,776,527
Issuance of 34,272 shares
of common stock 228 114,012
Dividends declared ($0.21)
per common share (361,471)
Change in net unrealized
gains on securities
available-for-sale, net of
Deferred tax of $49,076 95,191
Purchase of treasury stock (699,150)
Net income for the year
ended December 31, 1996 273,770
------------- -------------- ------------- --------------- ------------
BALANCE,
DECEMBER 31, 1996 12,930 5,952,130 (1,141,195) 217,515 14,688,826
Issuance of 71,358 shares
of common stock 476 237,384
Dividends declared ($0.24)
per common share (428,036)
Change in net unrealized
gains on securities
available-for-sale, net of
deferred tax of $104,000 202,184
Purchase of treasury stock (202,575)
Net income for the year
ended December 31, 1997 1,688,274
------------- -------------- ------------- --------------- ------------
BALANCE
DECEMBER 31, 1997 13,406 6,189,514 (1,343,770) 419,699 15,949,064
Redemption of odd shares (277)
due to stock split
Dividends declared ($0.292) (508,587)
per common share
Change in net unrealized
gains on securities
available-for-sale, net of
Deferred tax of $167,250 (324,659)
Purchase of treasury stock (1,288,652)
Net income for the year
ended December 31,1998 1,833,372
------------- -------------- ------------- --------------- ------------
BALANCE
DECEMBER 31, 1998 $ 13,406 $ 6,189,237 $ (2,630,422) $ 95,040 $ 17,273,849
============= ============== ============= =============== ============
</TABLE>
See accompanying notes to financial statements.
20
<PAGE> 18
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996
-------------------- ----------------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,833,372 $ 1,688,274 $ 273,770
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 73,500 84,000 91,900
Depreciation 175,256 166,252 146,410
Amortization 198,792 65,925 54,235
Deferred income taxes (17,800) 12,125 (120,970)
Gain on sale of assets (334,206) (56,656) (135,932)
FHLB stock dividends (125,800) (125,400) (117,400)
(Increase) decrease in
accrued interest receivable 46,031 (192,739) 11,162
(Increase) decrease in other assets (617,520) (516,983) 547,603
(Decrease) increase in other liabilities (95,243) 105,546 321,972
Other, net (160,491) 76,703 (371,748)
Proceeds from sale of loans originated for sale 17,364,729 11,711,972 3,461,645
Disbursements on loans originated for sale (17,284,023) (11,221,025) (3,873,604)
-------------------- ----------------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,056,597 1,797,994 289,043
-------------------- ----------------- ---------
Cash flows from investing activities:
Principal reductions on loans
and mortgage-backed securities 59,867,475 39,291,074 29,642,973
Disbursements on mortgage and
other loans originated for investment (43,458,689) (36,797,346) (34,171,188)
Proceeds from sale of student loans 232,116 361,650 853,274
Proceeds from sale of loan participations 608,000
Purchase of loans (1,057,779)
Purchase of investment securities:
Available-for-sale (31,417,422) (35,142,886) (4,198,996)
Proceeds from sale of investment securities:
Available-for-sale 15,065,000 9,976,883
Proceeds from maturities of investment securities:
Available-for-sale 27,155,000 12,845,000 5,625,000
Purchase of mortgage-backed securities:
Available-for-sale (40,909,711) (2,550,937) (4,004,727)
Proceeds from sale of mortgage-backed securities:
Available-for-sale 6,479,291
Proceeds from sale of other assets 101,376
Sale of FHLB stock 145,900 66,700 17,000
Proceeds from sale of real estate owned 172,956 149,127
Capital expenditures (240,820) (257,906) (327,434)
Proceeds from sale of property and equipment 6,432 11,689
-------------------- ----------------- ---------
NET CASH USED BY
INVESTING ACTIVITIES (7,075,428) (12,023,123) (6,763,374)
-------------------- ----------------- ---------
</TABLE>
Continued
See accompanying notes to financial statements.
21
<PAGE> 19
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996
--------------- ----------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 55,207 $ 7,558,413 $ 4,800,528
Purchase of deposits 5,087,993
Proceeds from sale of common stock 237,860 114,240
Purchase of treasury stock (1,286,652) (202,575) (699,150)
Payment of dividends (508,587) (428,036) (361,471)
Proceeds from (repayment of) Federal Home
Loan Bank advances, net 10,113,806 (960,658) (970,519)
Increase (decrease) in advances by borrowers
for taxes and insurance 24,090 956 (140,339)
--------------- ----------------- ---------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,397,864 6,205,960 7,831,282
--------------- ----------------- ---------------
NET INCREASE (DECREASE) IN CASH 2,379,033 (4,019,169) 1,356,951
Cash at beginning of year 5,990,285 10,009,454 8,652,503
--------------- ----------------- ---------------
CASH AT END OF YEAR $ 8,369,318 $ 5,990,285 $ 10,009,454
=============== ================= ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, including interest credited
to savings accounts $ 10,686,018 $ 10,494,547 $ 9,798,837
=============== ================= ===============
Income taxes $ 890,000 $ 675,000 $ 253,000
=============== ================= ===============
Supplemental disclosure of noncash activities:
Real estate acquired in settlement of loans $ 406,042
===============
Change in unrealized gain on available-for-sale securities $ (491,859) $ 306,258 $ 144,267
=============== ================= ===============
</TABLE>
See accompanying notes to financial statements.
22
<PAGE> 20
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING POLICIES:
The following describes the organization and the significant accounting
policies followed in the preparation of these financial statements.
ORGANIZATION
First Franklin Corporation (the Company) is a holding company formed in
1988 in conjunction with the conversion of Franklin Savings and Loan
Company (Franklin Savings) from a mutual to a stock savings and loan
association. The Company's financial statements include the accounts of its
wholly-owned subsidiary, Franklin Savings, and Franklin Savings'
wholly-owned subsidiary, Madison Service Corporation. All significant
inter-company transactions have been eliminated in consolidation.
Franklin Savings is a state chartered savings and loan, operating seven
banking offices in Hamilton County, Ohio through which it offers a full
range of consumer banking services. Franklin Savings is a member of the
Federal Home Loan Bank (FHLB) System, and is subject to regulation by the
Office of Thrift Supervision (OTS), a division of the U.S. Government
Department of Treasury. As a member of the FHLB, Franklin Savings maintains
a required investment in capital stock of the FHLB of Cincinnati.
Savings accounts are insured within certain limitations by the Savings
Association Insurance Fund (SAIF), which is administered by the Federal
Deposit Insurance Corporation (FDIC). An annual premium is required by the
SAIF for the insurance of such savings accounts.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash includes certificates of
deposit and other interest-earning deposits.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities are classified upon acquisition
into one of three categories: held-to-maturity, available-for-sale, or
trading (see Note 2).
Held-to-maturity securities are those debt securities that the Company has
the positive intent and ability to hold to maturity and are recorded at
amortized cost. Available-for-sale securities are those debt and equity
securities that are available to be sold in the future in response to the
Company's liquidity needs, changes in market interest rates, asset-
liability management strategies, and other reasons. Available-for-sale
securities are reported at fair value, with unrealized holding gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity, net of applicable taxes. At December 31, 1998 and
1997, the Company did not hold any trading securities.
Gains and losses realized on the sale of investment securities are
accounted for Fon the trade date using the specific identification method.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balance, less the allowance
for loan losses and net deferred loan origination fees and discounts.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions.
Changes in the overall local economy in which the Company operates may
impact the allowance for loan losses.
Loans, including impaired loans, are generally classified as non-accrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in
23
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND ACCOUNTING POLICIES, CONTINUED:
the process of collection. Loans that are on a current payment status or
past due less than 90 days may also be classified as non-accrual if
repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained
period of repayment performance by the borrower, in accordance with the
contractual terms of interest and principal. While a loan is classified as
non-accrual, interest income is generally recognized on a cash basis.
The Company's policy is to sell in the secondary market eligible fixed
rate, single-family loans originated. Loan sales totaled $17,364,729 and
$11,711,972 during 1998 and 1997. The amount of loans held for sale at
December 31, 1998 and 1997 is not material to the loan portfolio and thus
is not reported separately in the Company's balance sheet. It is generally
management's intention to hold all other loans originated to maturity or
earlier repayment.
The Company defers all loan origination fees, net of certain direct loan
origination costs, and amortizes them over the life of the loan as an
adjustment of yield.
REAL ESTATE OWNED
Real estate owned is initially carried at fair value less cost to sell at
the date acquired in settlement of loans (the date the Company takes title
to the property). Valuations are periodically performed by management, and
an allowance for losses is established by a charge to operations if the
carrying value of a property exceeds its estimated fair value at the
acquisition date. Costs relating to the holding of such properties are
expensed as incurred.
PROPERTY AND EQUIPMENT
Land is carried at cost. Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets. The cost of
leasehold improvements is amortized using the straight-line method over the
terms of the related leases.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
EARNINGS PER COMMON SHARE
Weighted average shares for 1997 and 1996 have been restated for the
adoption of Statement of Financial Accounting Standard (SFAS) No. 123
"Earnings Per Share". Earnings per common share have been computed on the
basis of the weighted average number of common shares outstanding, and,
when applicable, those stock options that are dilutive. Earnings per share
have been restated to account for a three for two stock split during 1998.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates used in the preparation of the
financial statements are based on various factors including the current
interest rate environment and the general strength of the local economy.
Changes in the overall interest rate environment can significantly effect
the Company's net interest income and the value of its recorded assets and
liabilities. Actual results could differ from those estimates used in the
preparation of the financial statements.
24
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES:
The amortized cost and estimated market values of investment securities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------- ------------------ ----------------- -----------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. Government
Corporations and agencies $ 18,190,495 $ 30,549 $ 8,191 $ 18,212,853
Obligations of states and
municipalities 850,604 61,689 912,293
-------------------- ------------------ ----------------- -----------------------
$ 19,041,099 $ 92,238 $ 8,191 $ 19,125,146
==================== ================== ================= =======================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------- ------------------ ----------------- -----------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 28,633,938 $ 51,681 $ 28,188 $ 28,657,431
Obligations of states and
municipalities 1,105,712 65,742 1,171,454
-------------------- ------------------ ----------------- -----------------------
$ 29,739,650 $ 117,423 $ 28,188 $ 29,828,885
==================== ================== ================= =======================
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturity because issuers may have the right to call
obligations at par.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------------------- ----------------
<S> <C> <C>
Available-for-sale:
Due in one year or less $ 180,203 $ 183,099
Due after one year through five years 4,723,508 4,772,221
Due after five years through ten years 12,791,447 12,811,237
Due after ten years 1,345,941 1,358,589
--------------------- ----------------
$ 19,041,099 $ 19,125,146
===================== ================
</TABLE>
The detail of interest and dividends on investment securities (including
dividends on FHLB stock) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996
--------------------- --------------- ---------------------
<S> <C> <C> <C>
Taxable interest income $ 1,696,177 $ 1,273,920 $ 982,075
Nontaxable interest income 66,331 69,018 67,453
Dividends 125,969 125,643 117,567
--------------------- --------------- ---------------------
$ 1,888,477 $ 1,468,581 $ 1,167,095
===================== =============== =====================
</TABLE>
25
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES, CONTINUED:
The amortized cost and estimated market values of mortgage-backed securities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------- ------------------ ----------------- ------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
FHLMC certificates $ 7,176,769 $ 16,762 $ 12,086 $ 7,181,445
FNMA certificates 17,793,764 66,406 13,856 17,846,314
GNMA certificates 18,491,760 49,552 46,836 18,494,476
-------------------- ------------------ ----------------- ------------------------
$ 43,462,293 $ 132,720 $ 72,778 $ 43,522,235
==================== ================== ================= ========================
Held-to-maturity:
FHLMC certificates $ 6,501,266 $ 116,253 $ 3,175 $ 6,614,344
FNMA certificates 5,393,722 1,855 1,307 5,394,270
Collateralized mortgage
obligations 460,180 460,180
-------------------- ------------------ ----------------- ------------------------
$ 12,355,168 $ 118,108 $ 4,482 $ 12,468,794
==================== ================== ================= ========================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------- ------------------ ----------------- ------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
FHLMC certificates $ 3,143,326 $ 111,126 $ 3,254,452
FNMA certificates 7,032,716 165,964 $ 8,689 7,189,991
GNMA certificates 8,032,075 278,238 8,310,313
-------------------- ------------------ ----------------- ------------------------
$ 18,208,117 $ 555,328 $ 8,689 $ 18,754,756
==================== ================== ================= ========================
Held-to-maturity:
FHLMC certificates $ 9,795,317 $ 143,814 $ 30,199 $ 9,908,932
FNMA certificates 6,893,525 106,480 6,787,045
Collateralized mortgage
obligations 469,322 469,322
-------------------- ------------------ ----------------- ------------------------
$ 17,158,164 $ 143,814 $ 136,679 $ 17,165,299
==================== ================== ================= ========================
</TABLE>
26
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. LOANS RECEIVABLE:
The Company originates primarily single-family real estate loans in
southwestern Ohio. Loans are originated on the basis of credit policies
established by the Company's management and are generally collateralized by
first mortgages on the properties. Management believes that the Company has
a diversified loan portfolio and there are no credit concentrations other
than in residential real estate.
Loans receivable, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
First mortgage loans:
Principal balances:
Collateralized by one to four-
family residences $ 120,767,680 $ 120,496,946
Collateralized by multi-family properties 7,262,448 7,654,962
Collateralized by other properties 15,571,636 18,071,235
Construction loans 7,149,298 6,129,861
------------- -------------
150,751,062 152,353,004
Less:
Undisbursed portion of construction loans (2,431,435) (2,255,844)
Net deferred loan origination fees (44,177) (161,515)
Unearned premiums 4,944 4,027
------------- -------------
TOTAL FIRST MORTGAGE LOANS 148,280,394 149,939,672
------------- -------------
Consumer and other loans:
Principal balances:
Consumer loans 1,715,176 2,561,104
Loans on savings accounts 836,673 852,561
Student loans 438,901 414,671
------------- -------------
TOTAL CONSUMER AND OTHER LOANS 2,990,750 3,828,336
------------- -------------
Less allowance for loan losses (1,091,867) (1,015,023)
------------- -------------
$ 150,179,277) $ 152,752,985
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $1,015,023 $ 928,896 $ 947,184
Provision for loan losses 73,500 84,000 91,900
Charge-offs and recoveries, net 3,344 2,127 (56,797)
Other changes -- -- (53,391)
---------- ---------- ----------
BALANCE, END OF YEAR $1,091,867 $1,015,023 $ 928,896
========== ========== ==========
</TABLE>
It is the opinion of management that adequate provisions have been made for
anticipated losses in the loan portfolio. At December 31, 1998 and 1997 the
recorded investment in loans for which impairment has been recognized was
immaterial to the Company's financial statements.The measurement of impaired
loans is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
approximately $55,888,000, $57,842,000 and $54,269,000 at December 31, 1998,
1997 and 1996, respectively.
Mortgage servicing rights of $215,810 and $145,638 were capitalized in 1998 and
1997, respectively. The fair value of mortgage servicing rights approximates the
current book value as of December 31, 1998 and 1997. Amortization of
mortgage-servicing rights was $61,595 and $13,462 for1998 and 1997,
respectively.
27
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. REAL ESTATE OWNED:
Real estate owned consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Real estate owned $233,252
Less allowance for losses (52,375)
--------
$180,877
========
</TABLE>
Activity in the allowance for losses on real estate owned is summarized
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C>
Balance, beginning of year $ 52,375
Allowance utilized in sale of real estate owned (52,375) $ (13,900)
Other changes 66,275
------- --------
BALANCE, END OF YEAR $ 52,375
======= ==========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Buildings and improvements $ 1,591,370 $ 1,485,452
Leasehold improvements 1,006,041 968,578
Furniture, fixtures and equipment 1,640,684 1,561,525
----------- -----------
4,238,095 4,015,555
Accumulated depreciation and amortization (2,738,743) (2,575,335)
----------- -----------
1,499,352 1,440,220
Land 539,431 539,431
----------- -----------
$ 2,038,783 $ 1,979,651
=========== ===========
</TABLE>
28
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. SAVINGS ACCOUNTS:
Savings accounts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------- -------------------------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF AVERAGE OF
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
-------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Passbooks 2.75% $ 23,220,058 11.5% 2.75% $ 22,553,861 11.1%
NOW accounts and variable
rate money market savings
and checking accounts 2.09 24,780,386 12.2 2.22 22,798,488 11.3
------------ ----- ------------ -----
48,000,444 23.7 45,352,349 22.4
------------ ----- ------------ -----
Certificates:
1-6 month 5.13 40,457,251 20.0 5.52 37,088,829 18.3
1 year 5.26 19,924,763 9.9 5.75 34,341,723 17.0
18 month 5.59 25,845,935 12.8 5.90 21,545,168 10.7
18 month - 5 years 5.80 45,569,318 22.5 5.91 37,534,789 18.6
5-8 years 5.74 17,811,867 8.8 5.75 22,656,736 11.2
Jumbos 4.48 4,651,814 2.3 5.19 3,686,591 1.8
------------ ----- ------------ -----
154,260,948 76.3 156,853,836 77.6
------------ ----- ------------ -----
TOTAL SAVINGS
ACCOUNTS $202,261,392 100.0% $202,206,185 100.0%
============ ===== ============ =====
</TABLE>
At December 31, 1998, scheduled maturities of certificate accounts are
as follows:
<TABLE>
<S> <C>
1999 $107,777,730
2000 29,940,081
2001 6,778,479
2002 917,508
2003 8,847,150
Thereafter --
------------
$154,260,948
============
</TABLE>
Interest and dividends paid and accrued on deposits, net of penalties assessed
depositors exercising early certificate withdrawal privileges, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Passbooks $ 619,736 $ 631,146 $ 683,238
NOW and money market accounts 473,835 493,555 528,380
Certificates 9,084,789 8,982,165 8,114,292
----------- ----------- -----------
$10,178,360 $10,106,866 $ 9,325,910
=========== =========== ===========
</TABLE>
29
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. FEDERAL HOME LOAN BANK ADVANCES:
FHLB advances at December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
INTEREST OUTSTANDING
MATURITY DATE RATE BALANCE
-------------- -------- -----------
<S> <C> <C>
05/01/06 8.15% $ 197,139
06/17/08 5.10 2,000,000
06/18/08 5.38 2,000,000
09/08/08 4.80 2,000,000
10/02/08 4.82 1,000,000
11/06/08 4.64 2,000,000
11,10,08 4.25 2,000,000
10/01/10 6.35 3,119,643
12/01/10 6.30 1,259,019
-----------
$15,575,801
===========
</TABLE>
The advances require principal payments as follows:
<TABLE>
<S> <C>
1999 $ 690,468
2000 615,619
2001 548,970
2002 489,713
2003 437,122
Thereafter 12,793,909
-----------
$15,575,801
===========
</TABLE>
As collateral for the advances, the Company has pledged mortgage loans
equal to or greater than 150% of the outstanding balance.
8. STOCKHOLDERS' EQUITY:
Retained earnings are restricted by regulatory requirements and federal
income tax requirements.
In connection with the insurance of savings deposits by SAIF, Franklin
Savings is required to maintain specified capital levels based on OTS
regulations (see Note 9). At December 31, 1998, the most restrictive
required level of capital to satisfy regulatory requirements was
approximately $9,525,000.
Franklin Savings and Loan Company was allowed a special bad debt deduction,
generally limited to 8% of otherwise taxable income, and subject to certain
limitations based on aggregate loans and deposit account balances at the
end of the year. If the amounts that qualify as deductions for federal
income taxes are later used for purposes other than bad debt losses,
including distributions in liquidation, such distributions will be subject
to federal income taxes at the then current corporate income tax rate.
Retained earnings at December 31, 1998, include approximately $3.18 million
for which federal income taxes have not been provided. The approximate
amount of unrecognized deferred tax liability relating to the cumulative
bad debt deduction was approximately $1.14 million at December 31, 1998.
A bill repealing the thrift bad debt reserve was signed into law and was
effective for taxable years beginning after December 31, 1995. All savings
banks and thrifts are required to account for tax reserves for bad debts in
the same manner as banks. Such entities with assets less than $500 million
are required to maintain a moving average experience based reserve and no
longer will be able to calculate a reserve based on a percentage of taxable
income.
Tax reserves accumulated after 1987 were automatically subject to
recapture. The recapture will occur in equal amounts over six years
beginning in 1997 and can be deferred up to two years, depending on the
level of loans originated. The tax law change has no effect as the Company
has had no increase in tax reserves accumulated after 1987. Pre-1988 tax
reserves will not have to be recaptured unless the thrift or successor
institution liquidates, redeems shares or pays a dividend in excess of
earnings and profits.
Payment of dividends on the common stock of the Company could be subject to
the availability of funds from dividend distributions of Franklin Savings,
which are subject to various restrictions. Under regulations of the OTS,
Franklin Savings is not permitted to pay dividends on its common stock if
its regulatory capital is reduced below the amount required to meet
applicable regulatory capital requirements. OTS regulations utilize a
tiered approach which permits various levels of distributions based
primarily upon an institution's capital level and net income. Based upon
current OTS regulations and its capital structure at December 31, 1998, the
Company may make capital distributions during a year up to 100% of its net
earnings current year to date, plus 50% of the amount by which the lesser
of the Company's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year. The amount of any dividends cannot
reduce the Company's capital below the liquidation account discussed below.
30
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCKHOLDERS' EQUITY, CONTINUED:
In accordance with regulatory requirements, Franklin Savings established a
special "Liquidation Account" for the benefit of certain savings account
holders in an amount equal to the regulatory capital of Franklin Savings as
of September 30, 1987 of $8.1 million. In the event of a complete
liquidation of Franklin Savings, each eligible account holder would be
entitled to his interest in the Liquidation Account prior to any payment to
holders of common stock, but after payments of any amounts due to the
creditors of Franklin Savings (including those persons having savings
accounts with Franklin Savings). The amount of the Liquidation Account is
subject to reduction as a result of savings account withdrawals by eligible
account holders after the conversion. Any assets remaining after the
payments of creditors and the above liquidation rights of eligible account
holders would be distributed to the holders of common stock in proportion to
their stock holdings.
The Company had a stock option plan (the 1987 Stock Option and Incentive
Plan) for officers, key employees, and directors, under which options to
purchase the Company's common shares were granted at a price no less than
the fair market value of the shares at the date of the grant. Options could
be exercised during a term to be determined by a committee appointed by the
Board of Directors, but in no event more than ten years from the date they
were granted. These options expired during 1997. The Company had authorized
the issuance of up to 186,600 common shares under the plan. Transactions
involving the 1987 Plan are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Options outstanding at beginning of year 71,358 108,054
Cancelled (2,424)
Exercised (71,358) (34,272)
------ -------
OPTIONS OUTSTANDING AT END OF YEAR 71,358
====== =======
</TABLE>
All options outstanding and exercised had an option price of $3.33.
During 1997, the Company established a new stock option plan (the 1997
Stock Option and Incentive Plan) for officers, key employees and directors,
under which options to purchase the Company's common stock are granted at a
price no less than the fair market value of the shares at the date of the
grant. Options may be exercised during a term to be determined by a
committee appointed by the Board of Directors, but in no event more than
ten years from the date they are granted. The Company has authorized the
issuance of 175,984 common shares under the plan. Transactions involving
the Plan are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Options outstanding at beginning of year 68,100
Granted -December 1998 and 1997 69,825 68,100
Cancelled (10,950)
Exercised
------- ------
OPTIONS OUTSTANDING AT END OF YEAR 126,975 68,100
======= ======
</TABLE>
All options have an exercise price between $13.56 and $19.80. The options
granted vest over a three year period from date of grant and the Company
has implemented certain performance goals for the grants to be exercisable.
The Company met the performance goals for the year 1998 thereby making the
1997 options exercisable over the next three years.
The Company applies Accounting Principles Board (APB) Opinion 25,
Accounting for Stock Issued to Employees, and related Interpretations in
accounting for its option plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair value at the grant
dates for the awards under those plans consistent with the method of SFAS
Statement 123, Accounting for Stock-Based Compensation, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Net income: As reported $1,833,372
Additional compensation cost 121,532
Pro forma net income 1,711,840
Basic earnings per share
As reported $1.05
Proforma .98
</TABLE>
The estimated fair value of options granted was calculated by the
Black-Scholes method. Assumption used in the calculations are as follows:
<TABLE>
<S> <C>
Risk-free interest rate U.S. Treasury strips rate on date of grant which was 4.8%
Expected life Life of options, which is ten years
Expected volatility .65% based on the 48 month history of stock prices
Expected dividends $.30 per share
</TABLE>
31
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. REGULATORY CAPITAL REQUIREMENTS:
The OTS has promulgated regulations implementing uniform minimum capital
requirements and capital adequacy standards for federally insured savings
associations. In general, the capital standards established for savings
institutions must be no less stringent than capital adequacy standards
applicable to national banks set by the Office of the Comptroller of the
Currency. At December 31, 1998, the capital adequacy standards include a 4%
tier 1 capital requirement and a risk-based capital requirement (computed
on a risk-adjusted asset base) of 8.0%. At December 31, 1998, Franklin
Savings meets each of the capital requirements as follows:
<TABLE>
<CAPTION>
FRANKLIN'S COMPUTED
CAPITAL AS A
COMPUTED FRANKLIN'S PERCENT OF
REGULATORY COMPUTED TOTAL ASSETS OR
REQUIREMENTS CAPITAL RISK-ADJUSTED ASSETS
------------ ---------- ----------------------
<S> <C> <C> <C>
Tier 1 capital $ 9,525,000 $ 15,361,000 6.45%
Risk-based capital 8,436,000 16,091,000 15.26%
</TABLE>
10. FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires that the Company disclose estimated fair values for its financial
instruments. The following methods and assumptions were used to estimate
the fair value of the Company's financial instruments.
CASH AND CASH EQUIVALENTS AND INVESTMENT IN FHLB STOCK
The carrying value of cash and cash equivalents and the investment in FHLB
stock approximates those assets' fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
For investment securities (debt instruments) and mortgage-backed
securities, fair values are based on quoted market prices, where available.
If a quoted market price is not available, fair value is estimated using
quoted market prices of comparable instruments.
LOANS RECEIVABLE
The fair value of the loan portfolio is estimated by evaluating homogeneous
categories of loans with similar financial characteristics. Loans are
segregated by types, such as residential mortgage, commercial real estate,
and consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms, and by performing and nonperforming
categories.
The fair value of performing loans, except residential mortgage loans, is
calculated by discounting contractual cash flows using estimated market
discount rates which reflect the credit and interest rate risk inherent in
the loan. For performing residential mortgage loans, fair value is
estimated by discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources. The fair
value for significant nonperforming loans is based on recent internal or
external appraisals. Assumptions regarding credit risk, cash flow, and
discount rates are judgmentally determined by using available market
information.
SAVINGS ACCOUNTS
The fair values of passbook accounts, NOW accounts, and the money market
savings and demand deposits equal their carrying values. The fair value of
fixed-maturity certificates of deposit is estimated using a discounted cash
flow calculation that applies interest rates currently offered for deposits
of similar remaining maturities.
FHLB ADVANCES
Rates currently available to the Company for advances with similar terms
and remaining maturities are used to estimate the fair value of existing
advances.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit approximates the contractual
amount due to the comparability of current levels of interest rates and the
committed rates.
32
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED:
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------- --------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,369,318 $ 8,369,318 $ 5,990,285 $ 5,990,285
Investment securities 19,125,146 19,125,146 29,828,885 29,828,885
Mortgage-backed securities 55,877,403 55,991,000 35,919,920 35,920,055
Loans receivable 150,179,277 151,517,000 152,752,985 155,572,000
Investment in FHLB stock 1,788,700 1,788,700 1,808,800 1,808,800
Financial liabilities:
Savings accounts 202,261,392 203,480,000 202,206,185 202,211,000
FHLB advances 15,575,801 15,994,000 5,461,995 5,461,995
</TABLE>
<TABLE>
<CAPTION>
CONTRACTUAL FAIR CONTRACTUAL FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Commitments to extend credit $4,110,000 $4,110,000 $1,952,000 $1,952,000
Unfunded construction loans 2,431,000 2,431,000 2,256,000 2,256,000
</TABLE>
11. FEDERAL INCOME TAXES:
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $ 924,170 $ 788,357 $ 254,312
Deferred (15,022) 12,125 (120,970)
--------- --------- ---------
$ 909,148 $ 800,482 $ 133,342
========= ========= =========
</TABLE>
Total income tax expense differed from the amounts computed by applying the
U.S. federal statutory tax rates to pretax income as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rates $ 932,457 $ 846,177 $ 138,419
Benefit of tax exempt interest (15,343) (15,771) (16,364)
Other (7,966) (29,924) 11,287
--------- --------- ---------
$ 909,148 $ 800,482 $ 133,342
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax asset arising from:
Loan loss reserve $ 387,000 $ 362,200
Deferred loan fees and costs 64,000 74,000
Depreciation 47,400 32,500
Other, net 27,700 25,400
--------- ---------
TOTAL DEFERRED TAX ASSETS 526,100 494,100
--------- ---------
Deferred tax liability arising from:
FHLB stock (365,100) (350,900)
Unrealized gain on securities (49,000) (216,200)
--------- ---------
TOTAL DEFERRED TAX LIABILITIES (414,100) (567,100)
--------- ---------
NET DEFERRED TAX (LIABILITY) ASSET $ 112,000 $ (73,000)
========= =========
</TABLE>
Net deferred tax (liabilities) assets and federal income tax expense in
future years can be significantly affected by changes in enacted tax rates.
33
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. BENEFIT PLANS
The Company has a noncontributory defined contribution pension plan and an
employee stock ownership plan which covers substantially all full-time
employees after attaining age twenty-one and completing one year of
service.
The Company implemented, during 1996, a noncontributory defined
contribution pension plan. The Company makes an annual contribution to the
plan equal to 10% of the eligible employees' compensation. Total expense
under this defined contribution plan was $110,190, $130,341 and $115,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company also has an employee stock ownership plan (ESOP). Each
participant is assigned an account which is credited with cash and shares
of common stock of the Company based upon compensation earned, subject to
vesting on a graduated scale over six years. Contributions to the ESOP are
made by the Company and can be in the form of either cash or common stock
of the employer. The Company contributed $100,000 to the ESOP in 1998, 1997
and 1996. At December 31, 1998, the ESOP is not leveraged, and all shares
are allocated or committed to be allocated. All ESOP shares are considered
outstanding for purposes of computing earnings per share for 1998, 1997,
and 1996. The Company's policy is to charge to expense the amount
contributed to the ESOP. At December 31, 1998, the ESOP held 150,103
allocated shares and 15,350 shares committed to be allocated.
13. LEASE COMMITMENTS:
The Company, as leasee, leases certain facilities under operating leases
which expire over the next thirteen years, with renewal options.
The following is a schedule, by years, of future minimum rental payments
required under operating leases during the remaining noncancelable portion
of the lease terms:
<TABLE>
<S> <C>
Year ending December 31:
1999 $120,310
2000 50,138
2001 18,860
2002 15,972
2003 15,972
Thereafter 101,156
-------
$322,408
========
</TABLE>
Rent expense was $163,693, $139,297 and $194,632 in 1998, 1997 and 1996,
respectively.
The Company, as lessor, leases a portion of its administrative office under
an operating lease which expires October 2002 with renewal options.
The following is a schedule, by years, of future minimum rental income
required under the operating lease during the remaining non-cancelable
portion of the lease term:
<TABLE>
<S> <C>
Year ending December 31:
1999 $ 99,186
2000 101,605
2001 102,089
2002 87,090
--------
$389,970
========
</TABLE>
34
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. LOANS TO RELATED PARTIES:
Certain officers and directors of the Company, including their families,
had loans outstanding exceeding $60,000 individually during the three-year
period ended December 31, 1998. The following is an analysis of the
activity of such loans for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996
----------------- ------------------ -----------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,484,053 $ 830,787 $ 717,079
Loans originated 745,640 696,776 456,113
Retirement of Director (205,000)
Repayments (285,850) (43,510) (137,405)
----------------- ------------------ -----------------------
BALANCE, END OF YEAR $ 1,943,843 $ 1,484,053 $ 830,787
================= ================== =======================
</TABLE>
15. LOAN COMMITMENTS:
In the ordinary course of business, the Company has various outstanding
commitments to extend credit that are not reflected in the accompanying
consolidated financial statements. These commitments involve elements of
credit risk in excess of the amount recognized in the balance sheet.
The Company uses the same credit policies in making commitments for loans
as it does for loans that have been disbursed and recorded in the
consolidated balance sheet. The Company generally requires collateral when
it makes loan commitments, which generally consists of the right to receive
first mortgages on improved or unimproved real estate when performance
under the contract occurs.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some portion of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Certain of these commitments are for fixed-rate loans, and, therefore,
their value is subject to market risk as well as credit risk.
At December 31, 1998, the Company's total commitment to extend credit was
approximately $4.11 million, and the Company had commitments to disburse
construction loans of approximately $2.43 million. The Company also had
undisbursed lines of credit on consumer and commercial loans of
approximately $370,000.
16. SUBURBAN FEDERAL DEPOSIT ACQUISITION:
On June 1, 1996, the Company purchased approximately $5.3 million of
deposits from Suburban Federal Savings Bank. After paying a deposit premium
of approximately $212,000 the Company received in cash from Suburban
approximately $5.1 million as consideration for the deposits assumed.
17. SAIF SPECIAL ASSESSMENT:
The deposits of the Company are presently insured by the SAIF, which
together with the BIF, are the two insurance funds administered by the
FDIC.
On September 30, 1996, the President signed an omnibus appropriations
package which included the recapitalization of the SAIF. All SAIF members
were required to pay a one-time assessment of 65.7 cents per $100 in
deposits held on March 31, 1995. The Company's special assessment was
$1,144,780. The assessment was charged against earnings during 1996.
Beginning January 1, 1997, SAIF members have been assessed a premium of 6.4
cents per $100 of deposits to cover the FICO obligation plus a regular
insurance premium. At the present time the regular insurance premium which
applies to the Company is the lowest risk category of $2,000 per year.
35
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. FIRST FRANKLIN CORPORATION - PARENT COMPANY ONLY FINANCIAL INFORMATION:
The following condensed balance sheets as of December 31, 1998 and 1997 and
condensed statements of income and cash flows for each of the three years
in the period ended December 31, 1998 for First Franklin Corporation should
be read in conjunction with the consolidated financial statements and notes
thereto.
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
----------------- -----------
<S> <C> <C>
Cash $ 1,060,035 $ 2,472,886
Investment securities:
Available-for-sale 2,143,904
Investment in Franklin Savings 15,524,906 15,688,750
Loans to Franklin Savings 3,300,000
Other assets 1,231,070 1,160,588
----------------- -----------
$ 21,116,011 $21,466,128
================= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 174,901 $ 238,215
Preferred stock - $.01 par value, 500,000 shares authorized,
none issued and outstanding Common stock - $.01 par value,
2,500,000 shares authorized, 2,010,867 shares issued in 1998 and 1997. 13,406 13,406
Additional paid-in capital 6,189,237 6,189,514
Treasury stock, at cost - 306,494 and 222,832 shares
in 1998 and 1997, respectively (2,630,422) (1,343,770)
Retained earnings 17,273,849 15,949,064
Net unrealized gain on available-for-sale
securities of parent and subsidiary 95,040 419,699
----------------- -----------
$ 21,116,011 $21,466,128
================= ===========
</TABLE>
36
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. FIRST FRANKLIN CORPORATION - PARENT COMPANY ONLY FINANCIAL INFORMATION,
CONTINUED:
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996
------------------- ---------------- --------------------
<S> <C> <C> <C>
Equity in earnings of Franklin Savings $ 1,746,771 $ 1,654,817 $ 146,741
Interest income 243,178 227,755 272,045
Operating expenses (353,019) (296,012) (113,337)
Other Income (loss) 222,842 107,664 26,296
Federal income tax expense (26,400) (5,950) (57,975)
------------------- ---------------- --------------------
$ 1,833,372 $ 1,688,274 $ 273,770
=================== ================ ====================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996
------------------- ---------------- --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,833,372 $ 1,688,274 $ 273,770
Equity in earnings of Franklin Savings (1,746,771) (1,654,817) (146,741)
Dividends received from Franklin Savings 1,582,000 277,000 464,000
Change in other assets and liabilities (41,908) 107,697 14,765
------------------- ---------------- --------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,626,693 418,154 605,794
------------------- ---------------- --------------------
Cash flows from investing activities:
Loan to Franklin Savings (3,300,000)
Maturity (purchase) of investment securities 2,150,000 1,000,000 500,000
Capital expenditures (94,305) (96,866) (188,129)
------------------- ---------------- --------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (1,244,305) 903,134 311,871
Cash flows from financing activities:
Payment of dividends (508,587) (428,036) (361,471)
Proceeds from sale of common stock 237,860 114,240
Purchase of treasury stock (1,286,652) (202,575) (699,150)
------------------- ---------------- --------------------
NET CASH USED IN FINANCING ACTIVITIES (1,795,239) (392,751) (946,381)
------------------- ---------------- --------------------
NET INCREASE (DECREASE) IN CASH (1,412,851) 928,537 (28,716)
Cash at beginning of year 2,472,886 1,544,349 1,573,065
------------------- ---------------- --------------------
CASH AT END OF YEAR $ 1,060,035 $ 2,472,886 $ 1,544,349
================= ================ =====================
</TABLE>
37
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. MADISON SERVICE CORPORATION:
In accordance with OTS requirements, the following summary of financial
information of Madison Service Corporation for the year ended December 31,
1998, is presented:
BALANCE SHEET
ASSETS
<TABLE>
<S> <C>
Cash $218,060
Other assets 15,000
--------
$233,060
========
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<S> <C>
Accrued expenses $ (63)
Equity 233,123
---------
$ 233,060
=========
</TABLE>
STATEMENT OF INCOME
<TABLE>
<S> <C>
Revenues:
Interest income $ 6,458
Service fees and other 10,770
Operating expenses (5,529)
--------
INCOME BEFORE FEDERAL INCOME TAX 11,699
Federal income tax 3,978
--------
NET INCOME $ 7,721
========
</TABLE>
a. Summary of significant accounting policies:
The accounting policies followed in the preparation of the financial
statements of Madison Service Corporation are included in Note 1.
b. Intercompany transactions:
Intercompany transactions with Franklin Savings, which are not material, have
been eliminated in consolidation.
c. Franklin Savings' investment in Madison Service Corporation consists of:
<TABLE>
<S> <C>
Common stock, 220 shares issued and outstanding $110,000
Retained earnings 123,123
--------
$233,123
========
</TABLE>
38
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. EARNINGS PER SHARE:
Earnings per share for the year ended December 31, 1998, 1997 and 1996 is
calculated as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic ESP
Income available to common stockholders $1,833,372 1,753,595 $ 1.05
========
Effect of dilutive securities:
Stock options - 1997 Plan
---------- ---------
Diluted EPS
Income available to common stockholders
+ assumed conversions $1,833,372 1,753,595 $ 1.05
========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $1,688,274 1,778,003 $ 0.95
========
Effect of dilutive securities:
Stock options
1987 Plan 54,384
1997 Plan 4,697
---------- ---------
Diluted ESP
Income available to common stockholders
+ assumed conversions $1,688,274 1,837,084 $ 0.92
========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic ESP
Income available to common stockholders $ 273,770 1,754,520 $ 0.16
========
Effect of dilutive securities:
Stock options - 1987 Plan 72,581
--------- ---------
Diluted EPS
Income available to common stockholders
+ assumed conversions $ 273,770 1,827,101 $ 0.15
========= ========= ========
</TABLE>
The effect of the stock options was anti-dilutive for the year ended December
31, 1998 and therefore the stock options were not included in the dilutive
EPS for the period.
39
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
All adjustments necessary for a fair statement of income for each period
have been included.
<TABLE>
<CAPTION>
1998
(DOLLARS IN THOUSANDS)
----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $4,203 $4,205 $4,133 $4,052
Interest expense 2,636 2,673 2,700 2,681
----- ----- ----- -----
NET INTEREST INCOME 1,567 1,532 1,433 1,371
Provision for loan losses 32 10 11 21
----- ----- ----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,535 1,522 1,422 1,350
Noninterest income 364 166 290 304
Noninterest expense 1,093 1,029 1,099 989
----- ----- ----- -----
INCOME BEFORE FEDERAL
INCOME TAXES 806 659 613 665
Federal income taxes 269 216 201 224
----- ----- ----- -----
NET INCOME $ 537 $ 443 $ 412 $ 441
====== ====== ====== ======
Earnings per common share
BASIC $ 0.30 $ 0.25 $ 0.24 $ 0.26
====== ====== ====== ======
DILUTED $ 0.30 $ 0.25 $ 0.24 $ 0.26
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1997
(DOLLARS IN THOUSANDS)
----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $3,955 $4,088 $4,213 $4,217
Interest expense 2,515 2,576 2,743 2,668
------ ------ ------ ------
NET INTEREST INCOME 1,440 1,512 1,470 1,549
Provision for loan losses 21 21 21 21
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,419 1,491 1,449 1,528
Noninterest income 110 142 171 211
Noninterest expense 1,008 974 1,008 1,043
------ ------ ------ ------
INCOME BEFORE FEDERAL
INCOME TAXES 521 659 612 696
Federal income taxes 173 217 203 207
------ ------ ------ ------
NET INCOME $ 348 $ 442 $ 409 $ 489
====== ====== ====== ======
Earnings per common share
BASIC $ 0.20 $ 0.25 $ 0.23 $ 0.27
====== ====== ====== ======
DILUTED $ 0.19 $ 0.24 $ 0.22 $ 0.27
====== ====== ====== ======
</TABLE>
40
<PAGE> 1
Exhibit 20
FIRST FRANKLIN CORPORATION
4750 ASHWOOD DRIVE
CINCINNATI, OHIO 45241
(513) 469-5352
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on April 26, 1999
Notice is hereby given that the Annual Meeting of Stockholders (the
"Meeting") of First Franklin Corporation (the "Company"), the holding company
for The Franklin Savings and Loan Company ("Franklin"), will be held at the
corporate office of the Company located at 4750 Ashwood Drive, Cincinnati, Ohio
45241 on April 26, 1999, at 3:00 p.m.
The Meeting is for the purpose of considering and acting upon:
1. The reelection of one director of the Company;
2. The ratification of the selection of Clark, Schaefer,
Hackett & Co. as the independent accountants of the Company
for the current fiscal year; and
3. Such other matters as may properly come before the Meeting
or any adjournments thereof.
The Board of Directors is not aware of any other business to come
before the Meeting. Any action may be taken on the foregoing proposals at the
Meeting on the date specified above, or on any date or dates to which the
Meeting may be adjourned.
Stockholders of record at the close of business on March 10, 1999, are
the stockholders entitled to vote at the Meeting and any adjournments thereof. A
Proxy Card and a Proxy Statement for the Meeting are enclosed. Please fill in
and sign the enclosed form of Proxy, which is solicited on behalf of the Board
of Directors, and mail it promptly in the enclosed envelope. The Proxy will not
be used if you submit a later-dated proxy or written revocation to the Company
before the commencement of voting at the Meeting or if you attend and vote at
the Meeting in person.
Cincinnati, Ohio By Order of the Board of Directors
March 25, 1999
Thomas H. Siemers
President and Chief Executive Officer
================================================================================
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED
WITHIN THE UNITED STATES.
================================================================================
<PAGE> 2
FIRST FRANKLIN CORPORATION
4750 ASHWOOD DRIVE
CINCINNATI, OHIO 45241
(513) 469-5352
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
APRIL 26, 1999
This Proxy Statement is furnished in connection with the solicitation
on behalf of the Board of Directors of First Franklin Corporation (the
"Company") of proxies to be used at the Annual Meeting of Stockholders of the
Company (the "Meeting"), which will be held at the corporate office of the
Company located at 4750 Ashwood Drive, Cincinnati, Ohio 45241, on April 26,
1999, at 3:00 p.m., and at all adjournments of the Meeting. The accompanying
Notice of Annual Meeting of Stockholders and this Proxy Statement are first
being mailed to stockholders on or about March 25, 1999.
Stockholders who execute proxies retain the right to revoke them at any
time prior to the votes being taken at the Meeting. Unless so revoked, the
shares represented by such proxies will be voted at the Meeting and all
adjournments thereof. Proxies may be revoked by the filing of a later-dated
proxy or written revocation prior to a vote being taken on a particular proposal
at the Meeting or by attending the Meeting and voting in person. Proxies
solicited on behalf of the Board of Directors of the Company will be voted in
accordance with the directions given therein and, in the absence of specific
instructions to the contrary, will be voted:
FOR the reelection of John L. Nolting as a director of the Company
=== for a term expiring in 2002;
FOR the ratification of the selection of Clark, Schaefer, Hackett &
=== Co. ("Clark Schaefer") as the independent accountants of the
Company for the current fiscal year.
A majority of the shares of the Company's issued and outstanding common
stock (the "Common Stock"), present in person or represented by proxy at the
Meeting, shall constitute a quorum for purposes of the Meeting. Abstentions and
broker Non-votes (defined below) are counted for purposes of determining a
quorum.
-1-
<PAGE> 3
VOTE REQUIRED
One director shall be elected by a plurality of the shares present in
person or by proxy at the Meeting and validly voted in the election of
directors. Shares as to which the authority to vote is withheld and shares held
by a nominee for a beneficial owner which are present in person or by proxy but
are not voted with respect to the election of directors ("Non-votes") are not
counted toward the election of directors. If the enclosed Proxy is signed, dated
and returned by the stockholder but no vote is specified thereon, the shares
held by such stockholder will be voted FOR the reelection of Mr. Nolting.
The affirmative vote of the holders of a majority of the shares present
in person or by proxy at the Meeting is necessary to ratify the selection of
Clark Schaefer as the independent accountants of the Company for the current
fiscal year. The effect of an abstention or a Non-vote is the same as a vote
against ratification. If the enclosed Proxy is signed and dated by the
stockholder, but no vote is specified thereon, the shares held by such
stockholder will be voted FOR the ratification of the selection of Clark
Schaefer as independent accountants.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Stockholders of record as of the close of business on March 10, 1999,
will be entitled to one vote for each share then held. As of that date, the
Company had 1,704,373 shares of Common Stock issued and outstanding.
The following table sets forth, as of March 10, 1999, share ownership
information regarding (i) those persons or entities who were known by management
to own beneficially more than five percent of the outstanding shares of Common
Stock; and (ii) all directors and executive officers of the Company and its most
significant subsidiary, The Franklin Savings and Loan Company ("Franklin"), as a
group.
<TABLE>
<CAPTION>
Shares Beneficially Percent of
Name and Address of Beneficial Owner Owned Class
- ------------------------------------ ------------------- ----------
<S> <C> <C>
Thomas H. Siemers(1) 231,288 13.5%
First Franklin Corporation
4750 Ashwood Drive
Cincinnati, Ohio 45241
All directors and executive officers of Franklin 451,549 26.3
and the Company as a group (11 persons)(2)
- -----------------------------
(Footnotes on next page.)
</TABLE>
-2-
<PAGE> 4
(1) Mr. Siemers, the President and Chief Executive Officer of the Company,
has sole voting and investment power with respect to 106,216 shares and
shared voting and investment power for 27,900 shares and options to
purchase 3,250 shares granted under the First Franklin Corporation 1997
Stock Option and Incentive Plan (the "1997 Option Plan"). Mr. Siemers
has sole voting and/or investment power with respect to 39,946 shares
allocated to his account in The Franklin Savings and Loan Company
Employee Stock Ownership Plan ("ESOP"). Finally, as the ESOP trustee,
Mr. Siemers may be deemed to have voting power, investment power or
both with respect to another 53,976 shares of Common Stock held by the
ESOP, which have not been allocated to the accounts of individual
participants or which have been allocated to the accounts of individual
participants and which may still be sold by the trustee.
(2) Includes shares held directly, shares allocated to executive officers'
accounts in the ESOP, shares subject to options granted under the 1997
Option Plan and shares held by controlled corporations or certain
family members, over which shares the specified individuals or group
effectively exercise sole or shared voting and investment power. Such
amount also includes the shares that may be deemed to be beneficially
owned by Mr. Siemers, as trustee of the ESOP of Franklin. Share
information for each director of the Company is included under
"Election of Directors."
ELECTION OF DIRECTORS
The Board of Directors is currently composed of five members. Directors
are elected to serve for three-year terms or until their respective successors
are elected and qualified. Approximately one-third of the Board of Directors of
the Company is elected annually.
The full Board of Directors acts as a nominating committee for the
annual selection of its nominees as directors. While the nominating committee
and the Board of Directors will consider nominees recommended by others, it has
not actively solicited nominations or established any procedures for this
purpose.
The following table sets forth certain information regarding the
composition of the Company's Board of Directors, including terms of office. It
is intended that the proxies solicited on behalf of the Board of Directors
(other than proxies in which the vote is withheld as to a nominee) will be voted
at this Meeting for the reelection of the nominee indicated below. If the
nominee is unable to serve, the shares represented by all valid proxies will be
voted for the election of such substitute as the Board of Directors may
recommend. At this time, the Board of Directors knows of no reason why the
nominee might be unable to serve if elected. Except as disclosed herein, there
are no arrangements or understandings between the nominee and any other person
pursuant to which the nominee was selected.
-3-
<PAGE> 5
<TABLE>
<CAPTION>
Positions held with Year first Shares
the Company Elected director of Term to Beneficially owned Percent
Name Age(1) and Franklin the Company/Franklin expire at March 10, 1999(2) of class
- ---- --- ------------ -------------------- ----------- -------------------- --------
<S> <C> <C> <C> <C> <C> <C>
NOMINEE
-------
John L. Nolting 66 Director 1987/1981 2002 2,000 0.1%
DIRECTORS REMAINING IN OFFICE
-----------------------------
James E. Cross 63 Director 1996/1978 2000 32,018 1.9%
Richard H. Finan 64 Director 1987/1968 2000 77,924 (3) 4.6%
James E. Hoff, 66 Director 1993/1993 2001 - -
S.J.
Thomas H. Siemers 65 President, Chief 1987/1953 2001 231,288 (4) 13.5%
Executive Officer
and Director
- -------------------------------
(1) As of March 10, 1999.
(2) Unless otherwise indicated by footnote, the individual has sole voting
and investment power with respect to all shares reported as owned.
(3) Mr. Finan has shared voting and investment power over 75,000 shares of
Common Stock.
(4) See footnote 1 to table under "VOTING SECURITIES AND PRINCIPAL HOLDERS
THEREOF."
</TABLE>
The business experience of each director during the last five years is
as follows:
JOHN L. NOLTING has been the President and Chief Executive Officer of
DataTech Services, Inc., a computer service company located in Cincinnati, since
1974. He also serves as the President and Chief Executive Officer of Queen City
Leasing, an automobile leasing company located in Cincinnati, and a Director and
the President of DirectTeller Systems, Inc.
JAMES E. CROSS is a partner in the Dayton, Ohio law firm of Allbery
Cross Fogarty and has practiced with that firm since 1985. He was a member of
the Board of Directors of Central Savings in Dayton, Ohio when it merged with
Franklin in 1978, and has served as a director of Franklin since then.
RICHARD H. FINAN is the President of the Ohio State Senate. He has been
a member of the Ohio legislature since 1973 and has had a legal practice since
1959. Mr. Finan also serves as legal counsel for Madison Service Corporation,
Franklin's wholly-owned subsidiary, and DirectTeller Systems, Inc., a joint
venture between the Company and DataTech Services, Inc. Mr. Finan is also a
director of Carillon Funds, Inc., a company that has a class of securities
registered under Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act").
-4-
<PAGE> 6
JAMES E. HOFF, S.J., has been the President of Xavier University in
Cincinnati, Ohio, since 1991. Prior to his arrival at Xavier, Fr. Hoff was
President of the Creighton Foundation and Vice President of University Relations
at Creighton University.
THOMAS H. SIEMERS has been employed by Franklin since 1949, has been a
director of Franklin since 1953, and has served as President and Chief Executive
Officer since 1968. From 1978 to 1983, Mr. Siemers served as a director of the
Federal Home Loan Bank of Cincinnati. Mr. Siemers also served as the Chairman of
the Ohio Savings and Loan League in 1981 and 1982 and on the Executive Committee
of the U.S. League of Savings Institutions from 1982 to 1985.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
Regular meetings of the Company's Board of Directors are held
quarterly. During the year ended December 31, 1998, the Company's Board of
Directors held a total of six regular and special meetings. All incumbent
directors of the Company attended at least 75% of the total meetings of the
Company's Board of Directors and meetings held by all committees of the
Company's Board of Directors on which such director served during this period,
except Fr. Hoff who attended five of seven meetings held.
The Company has an Audit Committee, which is composed of the four
outside directors. The Audit Committee met once during 1998. The Company has no
standing compensation or nominating committees.
The full Board of Directors acts as the nominating committee for the
annual selection of its nominees for the election of directors. During 1998, the
Board of Directors met once acting as a nominating committee. While the Board of
Directors will consider nominees recommended by stockholders, it has not
actively solicited nominations nor established any procedures for this purpose.
The Board of Directors of Franklin, the principal subsidiary of the
Company, consists of the five directors of the Company, Donald E. Newberry, Sr.,
and Mary W. Sullivan. Regular meetings of Franklin's Board of Directors are
generally held on a monthly basis. Franklin's Board of Directors held a total of
14 regular and special meetings during 1998. All directors attended at least 75%
of the total meetings of Franklin's Board of Directors and meetings held by all
committees of Franklin's Board of Directors on which such director served. The
Board of Directors of Franklin has standing Executive and Compensation
Committees.
The Executive Committee consists of the President and one member of
Franklin's Board of Directors who is selected weekly on an alternating basis
from the entire Board. This committee meets weekly (except during weeks when the
full Board meets) and exercises the power of Franklin's Board of Directors
between regular Board meetings. All actions of this committee are reviewed and
ratified by Franklin's full Board of Directors. This committee met 40 times
during 1998.
Franklin's Compensation Committee reviews and makes recommendations to
Franklin's Board of Directors with respect to executive compensation and other
benefit programs. The Compensation Committee is comprised of Messrs. Siemers,
Finan and Nolting. One meeting was held by this committee during 1998.
-5-
<PAGE> 7
COMPENSATION OF THE BOARD OF DIRECTORS
During 1998, directors fees paid by the Company and Franklin were
increased from $1,000 to $1,250 for each meeting of the Board of Directors of
the Company and Franklin held during the year. Mr. Siemers does not receive
directors fees from Franklin. No fees are currently paid by the Company or
Franklin for committee membership.
EXECUTIVE OFFICERS
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company and
Franklin who do not serve on the Company's Board of Directors. Each officer is
elected annually to serve until his or her successor shall have been elected and
qualified, or until he or she shall resign or be removed by the Board of
Directors. There are no arrangements or understandings between the persons named
and any other person pursuant to which such officers were selected.
JOSEPH F. HUTCHISON, age 57, joined the Company and Franklin in 1997 as
Senior Vice President of Corporate Development. Prior to joining the Company,
Mr. Hutchison served as President and Chief Executive Officer of Suburban
Federal Savings Bank and Suburban Bancorporation, Inc., of Cincinnati, Ohio. Mr.
Hutchison is currently a director of the Federal Home Loan Bank of Cincinnati
and a trustee of the Ohio League of Financial Institutions.
DAVID E. HAERR, age 66, joined Franklin in May 1998 as Vice President
and Chief Lending Officer. Prior to joining Franklin, Mr. Haerr served as Senior
Vice President of lending at Merchants Bank and Trust Company in West Harrison,
Indiana. Mr. Haerr has also held lending positions at Fifth Third Bank and
Provident Bank in Cincinnati.
GRETCHEN J. SCHMIDT, age 42, has been the Corporate Secretary/Treasurer
of the Company since 1988. She also serves as Vice President of Operations of
Franklin. Ms. Schmidt has held a variety of part-time positions with Franklin
since 1971, and full-time positions since 1978. Currently, she is responsible
for branch operations and general corporate administration. Ms. Schmidt is the
daughter of President Siemers.
DANIEL T. VOELPEL, age 50, has been Vice President/Chief Financial
Officer of the Company since 1988. He also serves as Vice President/Chief
Financial Officer of Franklin and Treasurer of DirectTeller Systems, Inc., and
Franklin's subsidiary, Madison Service Corporation. He has been with Franklin
since 1983.
EXECUTIVE COMPENSATION
The Company currently does not pay any compensation to its executive
officers. The following table shows the compensation paid or granted by Franklin
and its subsidiaries for services rendered during the periods indicated to each
executive officer whose annual compensation exceeded $100,000 during the fiscal
year.
-6-
<PAGE> 8
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
-------------------------------------------------------------
Annual Compensation Long Term Compensation
- ---------------------------------------------------------------------------------------------------------------------------
Awards
Name and Principal Year Salary ($) Bonus ($) Restricted Securities All Other Compensation
Position Stock Awards Underlying (2)(3)
($) Options/
SARs(#)(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THOMAS H. SIEMERS President, 1998 $222,683 - - 9,750 $30,000
Chief Executive Officer and 1997 213,562 - - 9,750 28,826
Director of the Company, 1996 208,512 - - - 28,454
Franklin and Madison Service
Corporation; Chairman of the
Board of DirectTeller
Systems, Inc.
JOSEPH F. HUTCHISON 1998 $127,853 4,500 -
Senior Vice President 1997 46,890 4,500 -
Corporate Development of the
Company and Franklin
DANIEL T. VOELPEL 1998 $112,325 - - 4,500 $22,374
Vice President and Chief 1997 108,870 - - 4,500 19,804
Financial Officer of the 1996 105,120 $ 2,000 - - 20,277
Company and Franklin,
Treasurer of Madison Service
Corporation and DirectTeller
Systems, Inc.
- -----------------------------
(1) Represents the number of shares of Common Stock underlying options
granted to Messrs. Siemers, Hutchison and Voelpel pursuant to the 1997
Option Plan.
(2) For Mr. Siemers, consists of contributions to the Company's defined
contribution plan in the amounts of $15,408, $16, 000 and $15,000, for
1998, 1997 and 1996, respectively, and the $14,592, $12,826 and $13,454
value of the allocations to his ESOP account for 1998, 1997 and 1996,
respectively.
(3) For Mr. Voelpel, consists of contributions to the Company's defined
contribution plan in the amounts of $11,702, $10,992 and $11,017, for
1998, 1997 and 1996, respectively, and the $10,672, $8,812 and $9,260
value of the allocations to his ESOP account, for 1998, 1997 and 1996,
respectively.
</TABLE>
EMPLOYMENT CONTRACT
On May 1, 1984, the Board of Directors of Franklin approved a five-year
employment agreement with Mr. Siemers. The contract provides for automatic
extensions of one year each upon the expiration of each year of the contract,
until either Franklin or Mr. Siemers gives written notice to the contrary,
subject to earlier termination by Franklin. Mr. Siemers will generally be
entitled to severance benefits if the contract is terminated without cause, as
defined in the contract.
-7-
<PAGE> 9
The employment agreement provides for a salary as determined by the
Board of Directors but not less than the employee's current annual salary.
Salary increases will be reviewed not less often than annually. The contract
provides, among other things, for participation in an equitable manner in
employee benefits applicable to executive personnel.
The contract provides for payment to the employee of an amount equal to
the present value of the employee's salary for the unexpired term of the
contract in the event there is a change in control of Franklin where employment
terminates involuntarily in connection with such change of control or within six
months thereafter. If Mr. Siemers' employment were terminated in connection with
a change in control while earning his current salary as of December 31, 1998, at
which date the unexpired term of the contract was 52 months, Mr. Siemers could
have received a cash payment of up to approximately $830,300 pursuant to his
contract. Such termination payments are provided on a similar basis in
connection with a voluntary termination of employment in connection with a
change in control which was at any time opposed by Franklin's Board of
Directors.
TRANSACTIONS WITH MANAGEMENT AND INDEBTEDNESS OF MANAGEMENT
Franklin, like many financial institutions, has followed a policy of
granting to its officers, directors and employees loans for the financing and
improvement of their personal residences and consumer loans for other purposes.
Except as set forth below, such loans are made in the ordinary course of
business and are made on substantially the same terms and collateral as those of
comparable transactions prevailing at the time and do not involve more than the
normal risk of collectibility or present other unfavorable features. Currently,
for loans to the employees, directors and officers of the Company or Franklin
and their family members, interest rates are generally set at 1% over Franklin's
cost of funds, subject to adjustment to market rates in the event that the
employment relationship is terminated. If the employment relationship is
terminated, the rate will revert to the contract rate and the modification will
be canceled. Loan fees on mortgage loans are generally waived except to the
extent of direct loan origination expenses incurred by Franklin. Other loans are
reviewed on an individual basis and any preferential treatment given is based on
the employees length of service, work performance and past credit history.
Set forth below is certain information at December 31, 1998, as to all
loans made by Franklin to each of its or the Company's current directors or
executive officers which were granted at less than market rates and which for
any one individual resulted in an aggregate indebtedness to Franklin exceeding
$60,000 at any time since January 1, 1997:
-8-
<PAGE> 10
<TABLE>
<CAPTION>
Largest amount Market interest
Nature of outstanding since Balance as of Current interest rate at the time
Name Date of loan indebtedness January 1, 1997 December 31, 1998 rate of Origination
---- ------------ ------------------ ----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Finan 06/15/84 First mortgage - $ 78,276 $68,948 6.625% 10.50%
personal residence
Joseph F. 03/09/98 First mortgage - 155,000 148,995 6.00 6.75
Hutchison personal residence
John L. Nolting 04/15/98 First mortgage - 126,000 124,044 6.00 7.375
personal residence
09/26/96 Consumer loan 16,412 8,449 7.50 9.50
12/11/98 Consumer loan 4,700 4,700 8.00 10.00
11/16/97 Consumer loan 14,000 0 5.93 6.93
Gretchen J. 09/01/98 First mortgage - 234,650 233,834 6.00 7.25
Schmidt personal residence
12/24/96 First mortgage - 146,700 0 5.875 7.875
personal residence
02/07/97 Consumer loan 19,413 13,075 7.00 9.00
02/13/98 Consumer loan 12,000 5,845 8.50 10.50
08/12/98 Consumer loan 2,535 2,205 6.75 7.75
</TABLE>
The Company owns a 51% interest in DirectTeller Systems, Inc.
("DirectTeller"), an Ohio corporation that markets computer software developed
by DataTech Services, Inc. ("DataTech"), to financial institutions. Director
Nolting is the President and Chief Executive Officer of DataTech. When this
venture was approved by the Board of Directors of the Company in 1989, Director
Nolting abstained from voting on the matter. The Company initially contributed
$50,000 and DataTech contributed the software it developed to the initial
capitalization of DirectTeller. The Company is responsible for maintaining the
financial records of DirectTeller and DataTech is obligated to manage the day to
day operations of DirectTeller, including software maintenance and marketing.
DataTech does not receive a management fee for performing these services. The
Company's investment in Direct Teller was $50,000 at December 31, 1998.
Director Finan is an attorney at law who from time to time provides
legal services to Madison Service Corporation and DirectTeller. During the year
ended December 31, 1998, fees paid by the subsidiaries of Franklin and the
Company did not exceed five percent of Mr. Finan's gross revenues for the last
fiscal year.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes of ownership in
-9-
<PAGE> 11
the Company by the tenth day of the month following a change. Officers,
directors and greater than 10% stockholders are required by regulation to
furnish the Company with copies of all Section 16(a) forms they file. To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the fiscal year ended December 31, 1998, all Section 16(a)
filings required were timely filed.
SELECTION OF INDEPENDENT ACCOUNTANTS
Clark Schaefer conducted the independent audit of the Company for the
year ended December 31, 1998 and the Board of Directors has selected Clark
Schaefer as the independent accountants of the Company for the fiscal year ended
December 31, 1999.
The Board of Directors is requesting and recommends that the
stockholders of the Company ratify the selection of Clark Schaefer as the
independent accountants of the Company for the current fiscal year. Management
of the Company expects that a representative of Clark Schaefer will be present
at the Annual Meeting, and that such representative will have an opportunity, if
desired, to make a statement and will be available to respond to appropriate
questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION
OF CLARK SCHAEFER AS INDEPENDENT ACCOUNTANTS OF THE COMPANY FOR THE CURRENT
FISCAL YEAR.
STOCKHOLDER PROPOSALS
To be eligible for inclusion in the Company's proxy materials for next
year's Annual Meeting of Stockholders, any stockholder proposal requesting
action at such meeting must be received at the Company's main office, 4750
Ashwood Drive, Cincinnati, Ohio 45241, no later than November 26, 1999. Any such
proposal shall be subject to the requirements of the proxy rules adopted under
the Exchange Act. In addition, if a shareholder intends to present a proposal at
next year's Annual Meeting of Stockholders without including the proposal in the
proxy materials related to that meeting, and if the proposal is not received by
February 10, 1999, then the proxies designated by the Board of Directors of the
Company for next year's Annual Meeting of Stockholders of the Company may vote
in their discretion on any such proposal any shares for which they have been
appointed proxies without mention of such matter in the proxy statement or on
the proxy card for such meeting.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matter should properly come before the Meeting, as
provided for in the Bylaws of the Company, it is intended that holders of the
proxies will act in accordance with their best judgment.
-10-
<PAGE> 12
The cost of solicitation of proxies will be borne by the Company. The
Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy materials
to the beneficial owners of Common Stock. In addition to solicitation by mail,
directors, officers and regular employees of the Company may solicit proxies
personally or by telegraph or telephone without additional compensation.
The Company's Annual Report to Stockholders, including financial
statements, is also enclosed. Any stockholders who have not received a copy of
such Annual Report may obtain a copy by writing to the Company. Such Annual
Report is not to be treated as part of the proxy solicitation materials, nor as
having been incorporated herein by reference.
BY ORDER OF THE BOARD OF DIRECTORS
Cincinnati, Ohio Thomas H. Siemers
March 25, 1999 President and Chief Executive Officer
-11-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Registrant has two subsidiaries: (1) The Franklin Savings and Loan
Company, a savings and loan association chartered under the laws of the State
of Ohio, and (2) DirectTeller Systems, Inc., an Ohio corporation engaged in
providing computer software services for financial institutions.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1998 ANNUAL
REPORT AND FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 309,318
<INT-BEARING-DEPOSITS> 8,060,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,647,381
<INVESTMENTS-CARRYING> 12,355,168
<INVESTMENTS-MARKET> 12,468,794
<LOANS> 151,271,144
<ALLOWANCE> 1,091,867
<TOTAL-ASSETS> 240,314,813
<DEPOSITS> 202,261,392
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,536,510
<LONG-TERM> 15,575,801
0
0
<COMMON> 13,406
<OTHER-SE> 20,927,704
<TOTAL-LIABILITIES-AND-EQUITY> 240,314,813
<INTEREST-LOAN> 11,894,693
<INTEREST-INVEST> 4,296,412
<INTEREST-OTHER> 401,906
<INTEREST-TOTAL> 16,593,011
<INTEREST-DEPOSIT> 10,178,360
<INTEREST-EXPENSE> 10,690,346
<INTEREST-INCOME-NET> 5,902,665
<LOAN-LOSSES> 73,500
<SECURITIES-GAINS> 247,289
<EXPENSE-OTHER> 4,210,335
<INCOME-PRETAX> 2,742,520
<INCOME-PRE-EXTRAORDINARY> 1,833,372
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,333,372
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 2.59
<LOANS-NON> 585,000
<LOANS-PAST> 806,000
<LOANS-TROUBLED> 244,000
<LOANS-PROBLEM> 712,000
<ALLOWANCE-OPEN> 1,015,023
<CHARGE-OFFS> 0
<RECOVERIES> 3,344
<ALLOWANCE-CLOSE> 1,091,867
<ALLOWANCE-DOMESTIC> 442,710
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 649,157
</TABLE>
