<PAGE> 1
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, 1999
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
FIRST FRANKLIN CORPORATION
----------------------------------
(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
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 469-5352
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
---------------------------------------------------
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
---------------------------------------------------
(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 $16.78 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 8, 2000, was $11.70 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.)
1,626,373 of the issuer's common shares were issued and outstanding on March 8,
2000.
Documents Incorporated by Reference and Included as Exhibits:
Part II of Form 10-KSB - Portions of 1999 Annual Report to Stockholders
Part III of Form 10-KSB - Portions of Proxy Statement for
2000 Annual Meeting of Stockholders
Transitional Small Business Disclosure Format Yes No X
--- ---
Index to Exhibits on page 33
<PAGE> 2
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, interest-earning deposits and
the stock of Franklin and DirectTeller Systems, Inc.
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 six 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,
1999, Franklin had approximately $249.48 million of assets, deposits of
approximately $192.22 million and stockholders' equity of approximately $16.78
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. Franklin also makes loans secured by
multi-family real estate and nonresidential real estate and loans for consumer
purposes.
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. As market conditions
permit, 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. 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 "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."
-2-
<PAGE> 3
During the fourth quarter of 1999, Franklin closed its branch office
located at 45 East Fourth Street, Cincinnati, Ohio following an internal
analysis that indicated that the cost of operating that branch was not justified
by the number of customers being served. Deposits held at that branch are being
serviced by a branch located about five miles from the closed location.
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 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 1999, interest rates offered on fixed-rate loans increased
substantially from levels experienced during the past few years, so demand for
fixed-rate mortgage loans declined. As a result, loans sold during 1999 declined
to $6.54 million from $17.36 million during 1998. No loans were held for sale at
December 31, 1999.
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 $210,000 were sold under that agreement in 1999 at a profit of
$3,800 compared to $226,000 at a profit of $6,200 in 1998 and $354,000 at a
profit of $7,300 in 1997.
-3-
<PAGE> 4
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,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ---------------- ---------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of loan
- ------------
Loans secured by real estate:
Residential $141,979 62.90% $128,030 61.09% $128,152 66.91% $127,046 65.92% $119,921 64.43%
Nonresidential 19,855 8.80 15,572 7.43 18,071 9.43 15,126 7.85 12,453 6.69
Construction 6,354 2.82 7,149 3.41 6,130 3.20 7,719 4.00 8,042 4.32
Consumer and other loans 4,207 1.86 2,991 1.43 3,829 2.00 4,120 2.14 4,738 2.55
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
172,395 76.38 153,742 73.36 156,182 81.54 154,011 79.91 145,154 77.99
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans held for sale -- -- -- -- -- -- -- -- -- --
Mortgage-backed securities
Held to maturity 13,596 6.02 12,355 5.90 17,158 8.95 19,622 10.18 22,258 11.96
Available for sale 39,719 17.60 43,462 20.74 18,208 9.51 19,107 9.91 18,701 10.05
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
53,315 23.62 55,817 26.64 35,366 18.46 38,729 20.09 40,959 22.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable
(before net items) $225,710 100.00% $209,559 100.00% $191,548 100.00% $192,740 100.00% $186,113 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Type of rate
- ------------
Fixed rate $131,922 58.45% $103,196 49.24% $ 85,265 44.51% $ 78,677 40.82% $ 70,551 37.91%
Adjustable rate 93,235 41.31 105,425 50.31 104,759 54.69 112,123 58.17 113,365 60.91
Passbook adjustable rate(1) 553 0.24 938 0.45 1,524 0.80 1,940 1.01 2,197 1.18
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable
(before net items) $225,710 100.00% $209,559 100.00% $191,548 100.00% $192,740 100.00% $186,113 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Type of security
- ----------------
Residential:
Single-family $180,065 79.77% $172,994 82.55% $152,199 79.46% $154,136 79.97% $149,019 80.07%
2-4 family 9,160 4.06 9,004 4.30 8,125 4.24 8,214 4.26 8,078 4.34
Multi-family 11,683 5.18 7,723 3.68 8,124 4.24 8,781 4.56 8,914 4.79
Nonresidential real estate 20,595 9.12 16,847 8.04 19,271 10.06 17,489 9.07 15,364 8.25
Student loans 704 0.31 439 0.21 415 0.22 533 .28 1,210 0.65
Consumer and other loans 3,503 1.56 2,552 1.22 3,414 1.78 3,587 1.86 3,528 1.90
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable
(before net items) $225,710 100.00% $209,559 100.00% $191,548 100.00% $192,740 100.00% $186,113 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
- ----------
(1) Loans have interest rates that adjust in accordance with the rates paid on
Franklin's passbook savings accounts.
-4-
<PAGE> 5
The following table presents a reconciliation of Franklin's loans
receivable and mortgage-backed securities after net items:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable and mortgage-backed
securities (before net items) $225,710 $209,559 $191,548
Less:
Loans in process 3,783 2,431 2,256
Deferred loan fees 40 44 162
Allowance for possible loan losses 976 1,092 1,015
Unearned expense (4) (5) (4)
Unrealized loss (gain) on available for
sale mortgage-backed securities 376 (60) (547)
-------- -------- --------
Total 5,171 3,502 2,882
-------- -------- --------
Loans receivable and mortgage-backed
securities - net $220,539 $206,057 $188,666
======== ======== ========
</TABLE>
The following schedule presents the contractual maturity of Franklin's
loan and mortgage-backed securities portfolio at December 31, 1999. 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, 2000.
<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:
2000 $ 28,966 7.38% $ 8,536 8.41% $29,114 6.36% $3,345 7.93% $ 69,961 7.11%
2001 and 2002 15,841 7.69 4,746 8.89 3,867 5.89 372 9.29 24,826 7.66
2003 and 2004 5,721 7.44 4,153 8.55 3,958 5.74 348 8.69 14,180 7.32
2005 to 2009 10,376 7.28 5,240 8.36 7,589 6.11 95 8.10 23,300 7.14
2010 to 2019 28,506 7.09 5,140 6.98 249 7.13 47 9.17 33,942 7.08
2020 and following 50,020 7.30 943 7.48 8,538 7.43 -- -- 59,501 7.32
-------- ---- ------- ---- ------- ---- ------ ---- -------- ----
Total $139,430 7.32% $28,758 8.21% $53,315 6.42% $4,207 8.13% $225,710 7.24%
======== ======= ======= ====== ========
</TABLE>
As of December 31, 1999, the total amount of loans and mortgage-backed
securities maturing or repricing after December 31, 2000, consisted of $30.90
million of adjustable-rate loans and $124.85 million of fixed-rate loans.
-5-
<PAGE> 6
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,
-----------------------------------------------
1999 1998 1997
------- --------- --------
<S> <C> <C> <C>
Loans originated:
One- to four-family $46,765 $ 58,762 $43,275
Multi-family 1,581 523 72
Nonresidential 6,525 139 825
Land 658 - 82
Consumer 3,019 1,545 3,278
------- --------- --------
Total loans originated 58,548 60,969 47,532
Mortgage-backed securities purchased 24,990 40,910 2,551
Loans purchased 82 30 24
------- --------- --------
Total loans originated and
mortgage-backed securities and
loans purchased 83,620 101,909 50,107
------- --------- --------
Loans sold:
One- to four-family 6,543 17,365 11,712
Multi-family -- -- --
Student 210 226 354
Mortgage-backed securities sold 2,887 6,335 --
Principal reductions and payoffs 57,829 59,971 39,233
------- --------- --------
Increase (decrease) in loans receivable 16,151 18,012 (1,192)
Decrease (increase) in net items (1,669) (621) 598
------- --------- --------
Net increase (decrease) in loans receivable $14,482 $ 17,391 $ (594)
======= ========= ========
</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. Depending on market conditions when loans
are sold, Franklin may retain the responsibility for servicing the loans or sell
them with servicing released. During 1999, Franklin sold approximately $6.54
million in fixed-rate residential loans to the Federal Home Loan Mortgage
Corporation ("FHLMC"). At December 31, 1999, Franklin serviced $50.88 million in
loans previously sold to others. Other loan fees and charges representing
servicing costs are recorded as income when collected. Loan originations during
1999 were $58.55 million, a decrease of 3.98% below 1998 levels. This decrease
in loan originations was the result of an increase in interest rates during the
second half of 1999. 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
-6-
<PAGE> 7
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
$2.77 million to one borrower at December 31, 1999. Franklin had no outstanding
loans in excess of such limit at December 31, 1999.
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, 1999, $189.23 million, or 83.83%, 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 1999, as a result of increasing interest rates, originations of
ARMs increased and originations of thirty-year and fifteen-year fixed-rate
mortgage loans, many of which are eligible for sale in the secondary market,
decreased. Origination of adjustable-rate loans tends to decrease Franklin's
exposure to changes in interest rates but also decreases interest income because
of the lower yields on adjustable-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, 1999, ARMs (not including loans with interest rates
tied to the rates paid on Franklin's passbook accounts) totaled $93.24 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, 1999, $796,000 of Franklin's ARMs were delinquent thirty days or
more. This represents 0.85% of all ARMs outstanding at that date, a decrease of
$844,000, or 51.46% 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, 1999, approximately $32.28 million, or 14.30%, 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 ten years or less. Loan fees on originated loans have
generally been 1.0% of the original loan amount (plus expenses). At December 31,
1999, $32.28 million, or 100.00%, 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).
-7-
<PAGE> 8
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), 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, 1999, three had a principal balance of more than
$1.0 million and seven others had principal balances in excess of $500,000. At
December 31, 1999, Franklin had eight borrowers, or groups of borrowers, with
loans in excess of $1.0 million, for a total of $11.84 million. The largest
amount outstanding to any of these borrowers or groups of borrowers was
approximately $2.64 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, 1999, Franklin's nonresidential mortgage loan
portfolio was $20.60 million, or 122.77% 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, 1999,
$4.21 million, or 1.86%, 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. At December 31, 1999,
Franklin had $1.90 million of this type of loan with outstanding balances of
$1.14 million. 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, 1999, mortgage-backed securities totaled approximately $53.32
million, or 23.62% of total loans and mortgage-backed securities, of which
$13.60 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 $13.60 million in
mortgage-backed securities designated as being held to maturity as of December
31, 1999, was $13.34 million. The remaining $39.72 million in mortgage-backed
securities held at December 31, 1999, 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 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 $6.49 million in collateralized mortgage
obligations ("CMOs"), which are secured by one- to four-family mortgage loans.
Although it can be useful for hedging and investment, a CMO can expose the
investor to
-8-
<PAGE> 9
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 CMOs
are not in the "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, 1999, $17.38 million, or 32.60%, of Franklin's
mortgage-backed securities had fixed rates. 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, 1999, $35.94 million, or 67.40%, 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. During 1999, prepayments on adjustable-rate mortgage-backed securities
increased substantially causing the amortization of the premiums associated with
those securities to increase. 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, 1999 At December 31, 1998
------------------------------------------ ------------------------------------------
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 $ 4,386 -- $ 80 $ 4,306 $ 6,501 $116 $3 $ 6,614
FNMA participation certificates 4,319 -- 156 4,163 5,394 2 1 5,395
GNMA participation certificate 4,891 -- 24 4,867 -- -- -- --
CMOs -- -- -- -- 460 -- -- 460
------- ---- ---- ------- ------- ---- --- -------
$13,596 - $260 $13,336 $12,355 $118 $4 $12,469
======= ==== ======= ======= ==== == =======
Mortgage-backed securities available for sale:
FHLMC participation certificates $ 6,251 $ 12 $198 $ 6,065 $ 7,177 $ 17 $12 $ 7,182
FNMA participation certificates 10,096 79 204 9,971 17,794 66 14 17,846
GNMA participation certificates 16,884 59 66 16,877 18,491 50 47 18,494
CMOs 6,488 - 60 6,428 -- -- -- --
------- ---- ---- ------- ------- ---- --- -------
$39,719 $150 $528 $39,341 $43,462 $133 $73 $43,522
======= ==== ==== ======= ======= ==== === =======
</TABLE>
The combined amortized cost of mortgage-backed and related securities
designated as held to maturity or available for sale at December 31, 1999 and
1998, 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,
--------------------------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Due within one year $ 741 $ --
Due after one through three years -- 1,183
Due after three years through five years 259 853
Due after five years through ten years 7,589 5,014
Due after ten years through twenty years 958 1,265
Due after twenty years 43,768 47,502
------- -------
$53,315 $55,817
======= =======
</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, 1999, $989,000 of
Franklin's loans and other assets were classified as "substandard," $163,000
were classified as "loss," no assets were classified as "doubtful" and $3.02
million were classified "special mention," for a total of $4.17 million, or
2.49%, 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,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
30-59 days $2,019 $2,513 $1,174 $2,551 $1,010
60-89 days 345 1,075 933 699 902
90 days and over 637 797 988 694 1,017
------ ------ ------ ------ ------
Total $3,001 $4,385 $3,095 $3,944 $2,929
====== ====== ====== ====== ======
</TABLE>
Under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan,"
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, 1999, 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
-10-
<PAGE> 11
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.
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,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate $291 $ 342 $ 249 $ 154 $ 368
Nonresidential real estate -- -- -- -- --
Consumer 190 243 200 214 204
------ ------ ------ ------ ------
Total 481 585 449 368 572
------ ------ ------ ------ ------
Total as a percentage of total assets 0.19% 0.24% 0.19% 0.17% 0.27%
Accruing loans delinquent more than 90 days:
Residential real estate 346 806 599 325 422
Nonresidential real estate 75 -- -- -- --
Consumer 37 -- -- -- 23
------ ------ ------ ------ ------
Total 458 806 599 325 445
------ ------ ------ ------ ------
Total as a percentage of total assets 0.18% 0.34% 0.26% 0.15% 0.21%
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
------ ------ ------ ------ ------
Total non-performing assets $939 $1,635 $1,329 $1,247 $1,372
====== ====== ====== ====== ======
Total non-performing assets as a percentage
of total assets 0.37% 0.68% 0.58% 0.56% 0.64%
====== ====== ====== ====== ======
Other loans of concern:
Residential real estate $1,001 $ 712 $ 424 $ 224 $ 888
Nonresidential real estate -- -- 57 355 389
Consumer -- -- 15 2 9
------ ------ ------ ------ ------
Total $1,001 $ 712 $ 496 $ 581 $1,286
====== ====== ====== ====== ======
Total as a percentage of total assets 0.40% 0.30% 0.22% 0.26% 0.60%
====== ====== ====== ====== ======
Unallocated allowance for loan losses $ 723 $ 649 $ 602 $ 557 $ 525
====== ====== ====== ====== ======
Total allowance for loan losses $ 976 $1,092 $1,015 $ 929 $ 947
====== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $43,500. The amount which was included in
interest income on such loans was $4,400 for the year ended December 31, 1999.
As of December 31, 1999, 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.
As of December 31, 1999, 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.
-11-
<PAGE> 12
Franklin's non-accruing loans at December 31, 1999, consisted of five
one- to four-family residential loans with an aggregate book value of $291,000
and nineteen consumer loans with an aggregate book value of $190,000. At
December 31, 1999, accruing loans delinquent more than 90 days consisted of four
loans totaling $346,000 secured by one- to four-family residential real estate,
one loan totaling $75,000 secured by commercial real estate and two consumer
loans totaling $37,000.
Other loans of concern at December 31, 1999, included 15 loans totaling
$1.0 million 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,
1999, Franklin had $976,000 of such allowances, $253,000 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.
During the second quarter of 1999, additions to loss reserves were
reduced by $163,000 due to the recapture of a specific reserve established in
1990 and 1991 against a renegotiated loan secured by a 50 unit motel located in
Cincinnati, Ohio, due to an unanticipated payoff of the loan.
-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,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ---- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,092 $1,015 $ 981 $947 $1,256
Charge-offs:
One- to four-family 10 -- 24 31 161
Multi-family -- -- 37 16 --
Nonresidential real estate -- -- -- -- --
Consumer 4 -- 2 11 178
------ ------ ------ ---- ------
Total charge-offs 14 -- 63 58 339
------ ------ ------ ---- ------
Recoveries:
One- to four-family 1 1 -- -- --
Multi-family -- -- -- -- --
Nonresidential real estate -- -- -- -- --
Consumer -- 2 13 -- --
------ ------ ------ ---- ------
Total recoveries 1 3 13 -- --
------ ------ ------ ---- ------
Net charge-offs 13 (3) 50 58 339
Additions charged to operations (103) 74 84 92 30
------ ------ ------ ---- ------
Balance at end of period $ 976 $1,092 $1,015 $981 $ 947
====== ====== ====== ==== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.008% (0.002)% 0.03% 0.04% 0.25%
====== ====== ====== ==== ======
Ratio of net charge-offs during the period to
average non-performing assets 1.01% (0.20)% 3.84% 4.52% 19.11%
====== ====== ====== ==== ======
</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,
-------------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------------
Percent of Percent of Percent of
loans in each loans in each loans in each
category category category
Amount to total loans Amount to total loans Amount to total loans
------ -------------- ------ -------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans:
One- to four-family $ 77 83.83% $ 74 86.85% $ 32 83.70%
Multi-family 125 5.18 118 3.68 115 4.24
Nonresidential real estate -- 9.12 164 8.04 187 10.06
Consumer 51 1.87 87 1.43 79 2.00
Unallocated 723 -- 649 -- 602 --
---- ------ ------ ------ ------ ------
Total loans (1) 976 100.00% 1,092 100.00% 1,015 100.00%
====== ====== ======
Repossessed assets:
One- to four-family -- -- --
Nonresidential real estate -- -- --
---- ------ ------
Total repossessed assets -- -- --
---- ------ ------
Total allowances $976 $1,092 $1,015
==== ====== ======
<CAPTION>
At December 31,
---------------------------------------------------
1996 1995
------------------------ -----------------------
Percent of Percent of
loans in each loans in each
category category
Amount to total loans Amount To total loans
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Loans:
One- to four-family $ -- 84.23% $ 14 84.41%
Multi-family 115 4.56 147 4.79
Nonresidential real estate 187 9.07 187 8.25
Consumer 70 2.14 74 2.55
Unallocated 557 -- 525 --
---- ------- ---- -------
Total loans (1) 929 100.00% 947 100.00%
---- ====== ---- ======
Repossessed assets:
One- to four-family 52 --
Nonresidential real estate -- --
---- ----
Total repossessed assets 52 --
---- ----
Total allowances $981 $947
==== ====
</TABLE>
- ----------
(1) All allowances for loan losses are specific allowances, except for the
unallocated category.
-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,
------------------------------------------------------------------------------
1999 1998 1997
----------------------- --------------------- ---------------------
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 $18,994 $17,977 $18,190 $18,213 $28,634 $28,658
Obligations of states and
municipalities 1,196 1,220 851 912 1,106 1,171
------- ------- ------- -------- ------- -------
Total $20,190 $19,197 $19,041 $19,125 $29,740 $29,829
======= ======= ======= ======= ======= =======
</TABLE>
The composition and maturities of the investment securities portfolio
are indicated in the following table:
<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------------------------------------------------------
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 $ -- $2,500 $11,986 $4,507 $18,993 $17,977
Obligations of states and
municipalities 165 369 416 247 1,197 1,220
---- ------ ------- ------ ------- -------
Total investment securities $165 $2,869 $12,402 $4,754 $20,190 $19,197
==== ====== ======= ====== ======= =======
Weighted average yield(1) 4.24% 6.14% 6.11% 6.96% 6.30%
</TABLE>
- ----------
(1) Yields reflected have not been computed on a tax equivalent basis.
-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, 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, 1999, 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 $20,886 44.95%
NOW 1.78 100 15,272 32.87
Super NOW 2.11 2,500 1,763 3.79
Money market 3.39 2,500 8,545 18.39
---- ------- ------
Total transaction accounts 2.52% $46,466 100.00%
==== ======= ======
Certificates of deposit:
7-31 day 3.00% $2,500 $327 0.23%
91 day 3.00 2,500 241 0.17
Six months 4.63 2,500 16,002 11.02
One year 5.06 500 27,187 18.72
18 months 5.29 500 29,572 20.36
Two years 5.39 500 21,252 14.64
Three years 5.93 500 27,099 18.66
Five years 5.71 2,500 18,667 12.85
Jumbo certificates(2) 4.72 100,000 4,746 3.27
Other(2) 5.49 500 114 0.08
---- -------- ------
Total certificates 5.33% $145,207 100.00%
==== ======== ======
</TABLE>
- ----------
(1) Includes $30.64 million of deposits held in IRA and Keogh accounts.
(2) Maturities vary.
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, 1999, 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,
--------------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Opening balance $202,261 $202,206 $194,648
Deposits 328,951 365,659 329,176
Withdrawals (347,507) (374,616) (330,673)
Interest credited 7,968 9,012 9,055
-------- -------- --------
Ending balance $191,673 $202,261 $202,206
======== ======== ========
</TABLE>
The following table sets forth, as of December 31, 1999, the amounts of
certificates of deposit maturing during the years indicated:
<TABLE>
<CAPTION>
Amounts maturing in the year
ending December 31,
--------------------------------------------------------------------
2003 and
2000 2001 2002 thereafter
------- ------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C>
4.00% and less $ 731 $ $ -- $ 3
4.01% - 5.00% 47,193 5,285 574 --
5.01% - 6.00% 36,167 20,379 10,322 10,842
6.01% - 7.00% 10,610 773 931 1,233
7.01% - 8.00% 23 69 -- --
8.01% - and over -- 31 8 33
------- ------- ------- -------
Total $94,724 $26,537 $11,835 $12,111
======= ======= ======= =======
</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,
-------------------------------------------------------
1999 1998 1997
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Change in deposit balances:
Passbook savings $ (2,334) $ 666 $(1,573)
NOW accounts (1,289) 3,245 (142)
Money market accounts 2,089 (1,263) (2,005)
Certificates:
7-31 day 28 101 (382)
91 day 29 117 (39)
6 months (23,902) 3,149 3,311
One year 7,313 (14,419) 8,124
18 months 3,726 4,301 (1,862)
Two years (6,609) 4,208 9,542
Thirty-two months - - (14)
Three years 9,415 3,835 (6,261)
Five years 918 (4,684) (1,424)
Jumbo certificates 94 965 499
Other (66) (166) (216)
-------- -------- -------
Total (decrease) increase $(10,588) $ 55 $ 7,558
======== ======== =======
</TABLE>
The following table indicates the amount of Franklin's certificates of
deposit by time remaining until maturity as of December 31, 1999:
<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 $21,296 $31,144 $30,538 $40,613 $123,591
Certificates of deposit of
$100,000 or more 3,430 4,851 3,465 9,870 21,616
------- ------- ------- ------- --------
Total certificates of
deposit $24,726 $35,995 $34,003 $50,483 $145,207
======= ======= ======= ======= ========
</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,
1999, were $37.11 million.
-18-
<PAGE> 19
The following table shows the FHLB advances outstanding as of December
31, 1999, by interest rate and maturity date:
<TABLE>
<CAPTION>
Maturity date Interest rate Outstanding balance
------------- ------------- -------------------
(In thousands)
<S> <C> <C>
01/31/00 4.85% $2,500
03/20/00 4.75 3,000
05/01/06 8.15 177
06/18/08 5.38 2,000
09/08/08 6.12 2,000
10/02/08 4.82 1,000
11/06/08 4.64 2,000
11/10/08 6.07 2,000
04/29/09 5.44 3,000
05/05/09 4.67 2,000
09/30/09 6.61 4,000
10/01/09 6.65 4,911
12/01/09 6.50 1,630
12/21/09 5.76 2,000
10/01/10 6.35 2,642
12/10/10 6.30 1,067
05/01/14 1.50 1,183
-------
Total $37,110
=======
</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,
---------------------------------------------
1999 1998 1997
------ ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding $5,872 $783 $1,874
Total average amount of borrowings
outstanding $2,659 $757 $ 976
Weighted average interest cost of borrowings
outstanding 5.05% 5.66% 6.46%
</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, 1999,
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, 1999, 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
-19-
<PAGE> 20
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.
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, 1999, 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, internet banking, convenient
branch locations with inter-branch deposit and withdrawal privileges at each,
and the "DirectTeller" system discussed above.
As of December 31, 1999, based on total assets, Franklin was the fourth
largest thrift institution headquartered in Hamilton County, Ohio.
EMPLOYEES
At December 31, 1999, Franklin had 42 full-time equivalent employees
and 15 part-time employees.
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.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act repealed prior laws which had generally prevented
banks from affiliating with securities and insurance firms and made other
significant changes in the financial services in which various types of
financial institutions may engage.
-20-
<PAGE> 21
Prior to the GLB Act, unitary savings and loan holding companies that
met certain requirements were the only financial institution holding companies
that were permitted to engage in any type of business activity, whether or not
the activity was a financial service. The GLB Act continues those broad powers
for unitary thrift holding companies in existence on May 4, 1999, including the
Company. Any thrift holding company formed after May 4, 1999, however, will be
subject to the same restrictions as multiple thrift holding companies, which
generally are limited to activities that are considered incidental to banking.
The GLB authorizes a new "financial holding company," which can own
banks and thrifts and which are also permitted to engage in a variety of
financial activities, including insurance and securities underwriting and agency
activities, as long as the depository institutions it owns are well capitalized,
well managed and meet certain other tests.
The GLB Act is not expected to have a material effect on the activities
in which the Company and Franklin currently engage, except to the extent that
competition from other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
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 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.
-21-
<PAGE> 22
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, 1999, 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, 1999
--------------------------------
Amount Percent
------- -------
(In thousands)
<S> <C> <C>
Tangible capital $17,645 7.06%
Requirement 3,748 1.50
------- -----
Excess $13,897 5.56%
======= =====
Core capital $17,645 7.06%
Requirement 9,995 4.00
------- -----
Excess $ 7,650 3.06%
======= =====
Total capital $18,458 15.97%
Risk-based requirement 9,246 8.00
------- -----
Excess $ 9,212 7.97%
======= =====
</TABLE>
Current capital requirements call for tangible capital of 1.5% of
adjusted total assets, core capital (which for Franklin is equity capital under
generally accepted accounting principles less goodwill and the unrealized loss
on available-for-sale securities) of 4.0% of adjusted total assets, except for
those institutions with the highest examination rating and acceptable levels of
risk, and risk-based capital (which for Franklin consists of core capital plus
general valuation reserves of $813,000) of 8% of risk-weighted assets. Its
current core capital level is 7.06% of adjusted total assets.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement. Pursuant to that requirement, a savings association must
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% is not subject to this
requirement. Franklin currently qualifies for such exception.
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 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. All undercapitalized
associations must submit a
-22-
<PAGE> 23
capital restoration plan to the OTS within 45 days after becoming
undercapitalized. Such associations 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, 1999, 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 (such as cash, certain time deposits,
bankers' acceptances, mortgage-backed securities and specified United States
Government, state or federal agency obligations) of not less than 4% of its net
withdrawable savings deposits plus borrowings payable in one year or less
computed as of the end of the prior quarter or based on the average daily
balance during the prior quarter. 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, 1999, was
$76.07 million, or 33.98%, and exceeded the 4.0% liquidity requirement by
approximately $67.11 million.
QUALIFIED THRIFT LENDER TEST. Savings associations must meet one of two
tests in order to be a qualified thrift lender ("QTL"). The first test requires
a savings association to maintain a specified level of investments in assets
that are designated as qualifying thrift investments ("QTIs"). Generally, QTIs
are assets related to domestic residential real estate and manufactured housing,
although they also include credit card, student and small business loans and
stock issued by any FHLB, the FHLMC or the FNMA. Under the QTL 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 nine out of every 12 months. The
second test permits a savings association to qualify as a QTL by meeting the
definition of "domestic building and loan association" under the Internal
Revenue Code of 1986, as amended (the "Code"). In order for an institution to
meet the definition of a "domestic building and loan association" under the
Code, at least 60% of its assets must consist of specified types of property,
including cash, loans secured by residential real estate or deposits,
educational loans and certain governmental obligations. The OTS may grant
exceptions to the QTL tests under certain circumstances. If a savings
association fails to meet either one of the QTL tests, the association and its
holding company become subject to certain operating and regulatory restrictions
and the savings association will not be eligible for new FHLB advances. At
December 31, 1999, Franklin qualified as a QTL.
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 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, 1999.
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
-23-
<PAGE> 24
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, 1999.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions. Capital distributions include, without limitation, payments of
cash dividends, repurchases and certain other acquisitions by an association of
its shares and payments to stockholders of another association in an acquisition
of such other association.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
net income for that year to date plus the retained net income for the preceding
two years; (ii) if the savings association will not be at least adequately
capitalized following the capital distribution; (iii) if the proposed
distribution would violate a prohibition contained in any applicable statute,
regulation or agreement between the savings association and the OTS (or the
FDIC), or violate a condition imposed on the savings association in an
OTS-approved application or notice. If a savings association subsidiary of a
holding company is not required to file an application, it must file a notice
with the OTS. Franklin did not pay dividends to the Company during 1999.
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. The broad latitude to engage in activities
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 restrictions
it deems 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 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, 1999, 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 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
-24-
<PAGE> 25
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 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.
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.
FRB RESERVE REQUIREMENTS. FRB regulations currently require that
Franklin maintain reserves of 3% of net transaction accounts (primarily NOW
accounts) up to $44.3 million (subject to an exemption of up to $5.0 million),
and of 10% of net transaction accounts in excess of $44.3 million. At December
31, 1999, 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 $1.97 million at December 31, 1999.
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
-25-
<PAGE> 26
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.
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 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.
In 1996 the "percentage of taxable income" method of accounting for bad
debts by thrift institutions was eliminated, 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)
-26-
<PAGE> 27
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.
The balance of the pre-1988 reserves is subject to the provisions of
Code 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, 1999,
Franklin's pre-1988 reserves for tax purposes totaled approximately $3.18
million. Franklin believes it had approximately $8.24 million of accumulated
earnings and profits for tax purposes as of December 31, 1999, 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 1995. 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 1999.
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.
-27-
<PAGE> 28
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at December 31,
1999, 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:
- ---------------------------
2000 Madison Road Owned N/A 1981 2,991
Cincinnati, Ohio 45208
1100 West Kemper Road Leased 6/04 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 4/10 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, 1999, the Company's office premises and equipment had a net book
value of $1.94 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.
-28-
<PAGE> 29
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
2000 Annual Meeting of Stockholders of First Franklin Corporation (the "Proxy
Statement") under the captions "Election Of Directors," "Executive Officers" and
"Transactions with Management and Indebtedness of Management," which is included
in Exhibit 20, is incorporated herein by reference.
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.
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.
-29-
<PAGE> 30
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 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, 1999.
-30-
<PAGE> 31
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.
<TABLE>
<S> <C>
By: /s/ Thomas H. Siemers By: /s/ Daniel T. Voelpel
---------------------------------------- ----------------------------------------
Thomas H. Siemers Daniel T. Voelpel
President, Chief Executive Officer Vice President and Chief Financial Officer
and a Director (Principal Accounting Officer)
Date: March 27, 2000 Date: March 27, 2000
By: /s/ Richard H. Finan By: /s/ James E. Cross
---------------------------------------- ----------------------------------------
Richard H. Finan James E. Cross
Director Director
Date: March 27, 2000 Date: March 27, 2000
By: /s/ James E. Hoff, S.J. By: /s/ John L. Nolting
---------------------------------------- ----------------------------------------
James E. Hoff, S.J. John L. Nolting
Director Director
Date: March 27, 2000 Date: March 27, 2000
</TABLE>
-31-
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
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 Included herewith
10(a) Employment Contract for Thomas H. Siemers Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No.
33-17417)
10(b) First Franklin Corporation 1997 Stock Option Incorporated by reference to the 1996 Form 10-KSB
and Incentive Plan
13 Portions of the Annual Report Included herewith
20 Proxy Statement Incorporated by reference to the Proxy Statement
filed with the Securities and Exchange Commission on
March 24, 2000.
21 Subsidiaries of First Franklin Corporation Included herewith
27 Financial Data Schedule Included herewith
</TABLE>
-32-
<PAGE> 1
EXHIBIT 3(b)
BYLAWS
OF
FIRST FRANKLIN CORPORATION
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office.
-----------------
The registered office of the Corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices.
-------------
The Corporation may also have offices at such other places both within
and without the State of Delaware as the board of directors may from time to
time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings.
-----------------
Meetings of the stockholders for the election of directors or for any
other purpose shall be held at such time and place, either within or without the
State of Delaware, as shall be designated from time to time by the board of
directors and stated in the notice of the meeting or in a duly executed waiver
of notice thereof.
Section 2. Annual Meetings.
---------------
The annual meetings of stockholders shall be held on such date and at
such time as shall be designated from time to time by the board of directors and
stated in the notice of the meeting, at which meetings the stockholders shall
elect by a plurality vote a board of directors and transact such other business
as may properly be brought before the meeting. Written notice of the annual
meeting stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than twenty nor more than
fifty days before the date of
<PAGE> 2
the meeting. The notice shall also set forth the purpose or purposes for which
the meeting is called.
Section 3. Special Meetings.
----------------
Unless otherwise prescribed by law or by the Certificate of
Incorporation, special meetings of stockholders, for any purpose or purposes,
may be called by the president and shall be called by such individual at the
written request of a majority of the directors then in office. Such request
shall state the purpose or purposes of the proposed meeting. Written notice of a
special meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called shall be given not less than twenty
nor more than fifty days before the date of the meeting to each stockholder
entitled to vote at such meeting.
Section 4. Quorum.
------
Except as otherwise provided by law or by the Certificate of
Incorporation, the holders of a majority of the capital stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder entitled to vote at the
meeting.
Section 5. Voting.
------
Except as otherwise required by law, the Certificate of Incorporation
or these bylaws, any question brought before any meeting of stockholders shall
be decided by the vote of the holders of a majority of the stock duly voted on
the question. Each stockholder represented at a meeting of stockholders shall be
entitled to cast one vote for each share of the capital stock entitled to vote
thereat held by such stockholder. Such votes may be cast in person or by proxy.
The board of directors, in its discretion, or the officer of the Corporation
presiding at a meeting of stockholders, in his discretion, may require that any
votes cast at such meeting shall be cast by written ballot.
Section 6. List of Stockholders Entitled to Vote.
-------------------------------------
The officer of the Corporation who has charge of the stock ledger of
the Corporation shall prepare and make, at least twenty days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
<PAGE> 3
germane to the meeting, during ordinary business hours, for a period of at least
twenty days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder of the
Corporation who is present.
Section 7. Stock Ledger.
------------
The stock ledger of the Corporation shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list required
by Section 6 of this Article II or the books of the Corporation or to vote in
person or by proxy at any meeting of stockholders.
Section 8. Proxies.
-------
At all meetings of stockholders, a stockholder may vote by proxy
executed in writing by the stockholder or his duly authorized attorney in fact.
Proxies solicited on behalf of .the management shall be voted as directed by the
stockholder or, in the absence of such direction, as determined by a majority of
the board of directors. No proxy shall be valid after eleven months from the
date of its execution except for a proxy coupled with an interest.
Section 9. Voting of Shares in the Name of Two or More Persons.
---------------------------------------------------
When ownership stands in the name of two or more persons, in the
absence of written direction to the Corporation to the contrary, at any meeting
of the stockholders of the Corporation any one or more of such stockholders may
cast, in person or by proxy, all votes to which such ownership is entitled. In
the event an attempt is made to cast conflicting votes, in person or by proxy,
by the several persons in whose names shares of stock stand, the vote or votes
to which those persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
Section 10. Voting of Shares by Certain Holders.
-----------------------------------
Shares standing in the name of another corporation may be voted by any
officer, agent or proxy as the bylaws of such corporation may prescribe, or in
the absence of such provision, as the board of directors of such corporation may
determine. Shares held by an administrator, executor, guardian or conservator
may be voted by him, either in person or by proxy, without a transfer of such
shares into his name. Shares standing in the name of a trustee may be voted by
him, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him without a transfer of such shares into his name. Shares
standing in the name of a receiver may be voted by such receiver, and shares
held by or under the control of a receiver may be voted by such receiver without
the transfer into his name if authority to do so is contained in an appropriate
order of the court or other public authority by which such receiver was
appointed.
<PAGE> 4
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 11. Inspectors of Election.
----------------------
In advance of any meeting of stockholders, the board of directors may
appoint any persons other than nominees for office as inspectors of election to
act at such meeting or any adjournment thereof. The number of inspectors shall
be either one or three. If the board of directors so appoints either one or
three such inspectors, that appointment shall not be altered at the meeting. If
inspectors of election are not so appointed, the president may, and on the
request of not less than ten percent of the votes represented at the meeting
shall, make such appointment at the meeting. If appointed at the meeting, the
majority of the voters present shall determine whether one or three inspectors
are to be appointed. In case any person appointed as inspector fails to appear
or fails or refuses to act, the vacancy may be filled by appointment by the
board of directors in advance of the meeting or at the meeting by the president.
Unless otherwise prescribed by law, the duties of such inspectors shall
include: determining the number of shares of stock and the voting power of each
share, the shares of stock represented at the meeting, the existence of a
quorum, the authenticity, validity and effect of proxies; receiving votes,
ballots or consents; hearing and determining all challenges and questions in any
way arising in connection with the right to vote; counting and tabulating all
votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all stockholders.
Section 12. Conduct of Meetings.
-------------------
Annual and special meetings shall be conducted in accordance with the
most current edition of Robert's Rules of Order unless otherwise prescribed by
law or these bylaws. The board of directors shall designate, when present, the
president to preside at such meetings.
Section 13. New Business.
------------
Any new business to be taken up at the annual meeting shall be stated
in writing and filed with the secretary of the Corporation at least ten days
before the date of the annual meeting, and all business so stated, proposed and
filed shall be considered at the annual meeting, but no other proposal shall be
acted upon at the annual meeting. Any stockholder may make any other proposal at
the annual meeting and the same may be discussed and considered, but unless
stated in writing and filed with the secretary at least five days before the
meeting, such proposal shall be laid over for action at an adjourned, special or
annual meeting of the stockholders taking place
<PAGE> 5
thirty days or more thereafter. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of reports of
officers, directors or committees, but in connection with such reports no new
business shall be acted upon at such annual meeting unless stated and filed as
herein provided.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors.
--------------------------------
The number of directors shall be five. Directors need not be residents
of the State of Delaware. The directors, other than the first board of
directors, shall be elected at annual meetings of the stockholders. Changes in
the number of directors, within the limits, if any, specified in the Certificate
of Incorporation, may be accomplished through amendment of these bylaws.
Section 2. Vacancies.
---------
The board of directors shall divide the directors into three classes
and, when the number of directors is changed, shall determine the class or
classes to which the increased or decreased number of directors shall be
apportioned; provided, that each class shall be equal or nearly equal in size as
possible; provided, further, that no decreases in the number of directors shall
affect the term of any director then in office, except the initial directors.
The term of office of directors elected at the initial special meeting of
stockholders shall be as follows: the term of office of directors of the first
class shall expire at the first annual meeting of stockholders after their
election; the term of office of directors of the second class shall expire at
the second annual meeting of stockholders after their election; and the term of
office of directors of the third class shall expire at the third annual meeting
of stockholders after their election; and, as to directors of each class, when
their respective successors are elected and qualified. At each annual meeting of
stockholders subsequent to the initial special meeting of stockholders,
directors elected to succeed those whose terms are expiring shall be elected for
a term of office to expire at the third succeeding annual meeting of
stockholders and when their respective successors are elected and qualified.
Vacancies in the board of directors, however caused, shall be filled by
a majority vote of the directors then in office, whether or not a quorum, and
any director so chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of the class to which he has been
chosen expires and when his successor is elected and qualified.
Section 3. Duties and Powers.
-----------------
The business of the Corporation shall be managed by or under the
direction of the board of directors, which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the Certificate of Incorporation or by these bylaws directed
<PAGE> 6
or required to be exercised or done by the stockholders. The board of directors
shall annually elect a president from among its members and shall designate,
when present, the president to preside at its meetings.
Section 4. Meetings.
--------
The board of directors of the Corporation may hold meetings, both
regular and special, either within or without the State of Delaware. The annual
regular meeting of the board of directors shall be held without other notice
than this by-law immediately after, and at the same place as, the annual meeting
of stockholders. Additional regular meetings of the board of directors may be
held without notice at such time and at such place as may from time to time be
determined by the board of directors. Special meetings of the board of directors
may be called by the chairman, the president or a majority of directors then in
office. Notice thereof stating the place, date and hour of the meeting shall be
given to each director either by mail not less than forty-eight hours before the
date of the meeting, or by telephone or telegram on twenty-four hours' notice.
Section 5. Quorum.
------
Except as may be otherwise specifically provided law, the Certificate
of Incorporation or these bylaws, at all meetings of the board of directors, a
majority of the directors then in office shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the board of
directors. If a quorum shall not be present at any meeting of the board of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 6. Actions of the Board.
--------------------
Unless otherwise provided by the Certificate of Incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors or of any committee thereof may be taken without a meeting, if all
the members of the board of directors or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the board of directors or committee.
Section 7. Meetings by Means of Conference Telephone.
-----------------------------------------
Unless otherwise provided by the Certificate of Incorporation or these
bylaws, members of the board of directors of the Corporation, or any committee
designated by the board of directors, may participate in a meeting of the board
of directors or such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participating in a meeting pursuant to this
Section 7 shall constitute presence in person at such meeting.
<PAGE> 7
Section 8. Compensation.
------------
The directors may be paid their reasonable expenses, if any, of
attendance at each meeting of the board of directors and may be paid a
reasonable sum for service on the board of directors. Directors, as such, may
receive a stated salary for their services. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation there for. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 9. Interested Directors.
--------------------
No contract or transaction between the Corporation and one or more of
its directors or officers, or between the Corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer is present at or participates in the meeting of the board of
directors or committee thereof which authorizes the contract or transaction, or
solely because his or their votes are counted for such purpose, if (i) the
material facts as to his or their relationship or interest and as to the
contract or transaction are disclosed or are known to the board of directors or
the committee, and the board of directors or committee in good faith authorizes
the contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (ii) the material facts as to his or their relationship or interest
and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the board of directors, a committee thereof
or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the board of directors or
of a committee which authorizes the contract or transaction.
Section 10. Corporate Books.
---------------
The directors may keep the books of the Corporation, except such as are
required by law to be kept within the state, outside of the State of Delaware at
such place or places as they may from time to time determine.
Section 11. Presumption of Assent.
---------------------
A director of the Corporation who is present at a meeting of the board
of directors at which action on any Corporation matter is taken shall be
presumed to have assented to the action taken unless his dissent or abstention
shall be entered in the minutes of the meeting or unless he shall file his
written dissent to such action with the person acting as the secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the Corporation within five days after the
date he receives a copy of the minutes of the meeting. Such right to dissent
shall not apply to a director who voted in favor of such action.
<PAGE> 8
Section 12. Resignation.
-----------
Any director may resign at any time by sending a written notice of such
resignation to the home office of the Corporation addressed to the president.
Unless otherwise specified therein such resignation shall take effect upon
receipt thereof by the president. More than three consecutive absences from
regular meetings of the board of directs, unless excused by resolution of the
board, shall automatically constitute a resignation, effective when such
resignation is accepted by the board of directors.
Section 13. Nominating Committee.
--------------------
The board of directors shall act as a nominating committee for
selecting the management nominees for election as directors. Except in the case
of a nominee substituted as a result of the death or other incapacity of a
management nominee, the nominating committee shall deliver written nominations
to the secretary at least twenty days prior to the date of the annual meeting.
Provided such committee makes such nominations, no nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by stockholders are made in writing and
delivered to the secretary of the Corporation at least fifteen days prior to the
date of the annual meeting. Ballots bearing the names of all the persons
nominated by the nominating committee and by stockholders shall be provided for
use at the annual meeting. If the nominating committee shall fail or refuse to
act at least twenty days prior to the annual meeting, nominations for directors
may be made at the annual meeting by any stockholder entitled to vote and shall
be voted upon.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment.
-----------
The board of directors, by resolution adopted by a majority of the full
board, may designate the chief executive officer and other directors to
constitute an executive committee. The designation of any committee pursuant to
this Article IV and the delegation of authority thereto shall not operate to
relieve the board of directors, or any director, of any responsibility imposed
by law or regulation.
Section 2. Authority.
---------
The executive committee, when the board of directors is not in session,
shall have and may exercise all the powers and authority of the board of
directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it, except to the extent, if any, that such powers and authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the power or authority of the board
of directors with reference to amending the Certificate of Incorporation;
adopting an agreement of merger or
<PAGE> 9
consolidation; recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets; recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution; amending the bylaws of the Corporation; or approving a transaction
in which any member of the executive committee, directly or indirectly, has any
material beneficial interest; and unless the resolution or bylaws expressly so
provide, the executive committee shall not have the power or authority to
declare a dividend or to authorize the issuance of stock.
Section 3. Tenure.
------
Subject to the provisions of Section 8 of this Article IV, each member
of the executive committee shall hold office until the next annual regular
meeting of the board of directors following his designation and until his
successor is designated as a member of the executive committee.
Section 4. Meetings.
--------
Regular meetings of the executive committee may be held without notice
at such times and places as the executive committee may fix from time to time by
resolution. Special meetings of the executive committee may be called by any
member thereof upon not less than one day's notice stating the place, date and
hour of the meeting, which notice may be written or oral. Any members of the
executive committee may waive notice of any meeting and no notice of any meeting
need be given to any member thereof who attends in person. The notice of a
meeting of the executive committee need not state the business proposed to be
transacted at the meeting.
Section 5. Quorum.
------
A majority of the members of the executive committee shall constitute a
quorum for the transaction of business at the meeting thereof, and action of the
executive committee must be authorized by the affirmative vote of a majority of
the members present at a meeting at which a quorum is present.
Section 6. Action Without a Meeting.
------------------------
Any action required or permitted to be taken by the executive committee
at a meeting may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all of the members of the
executive committee.
Section 7. Vacancies.
---------
Any vacancy in the executive committee may be filled by a resolution
adopted by a majority of the full board of directors.
<PAGE> 10
Section 8. Resignations and Removal.
------------------------
Any member of the executive committee may be removed at any time with
or without cause by resolution adopted by a majority of the full board of
directors. Any members of the executive committee may resign from the executive
committee at any time by giving written notice to the president or secretary of
the Corporation. Unless otherwise specified therein, such resignation shall take
effect upon receipt. The acceptance of such resignation shall not be necessary
to make it effective.
Section 9. Procedure.
---------
The executive committee shall elect a presiding officer from its
members and may fix its own rules of procedure which shall not be inconsistent
with these bylaws. It shall keep regular minutes of its proceedings and report
the same to the board of directors for its information at the meeting thereof
held next after the proceedings shall have been taken.
Section 10. Other Committees.
----------------
The board of directors may by resolution establish an audit committee,
a loan committee or other committees composed of directors as they may determine
to be necessary or appropriate for the conduct of the business of the
Corporation and may prescribe the duties, constitution and procedures thereof.
ARTICLE V
OFFICERS
Section 1. General.
-------
The officers of the Corporation shall be chosen by the board of
directors and shall be a president, a secretary and a treasurer. The board of
directors may designate one or more vice- president, assistant secretaries,
assistant treasurers and other officers. The offices of secretary and treasurer
may be held by the same person and a vice-president may also be either the
secretary or the treasurer. The officers of the Corporation need not be either
stockholders or directors of the Corporation.
Section 2. Election.
--------
The board of directors at its first meeting held after the annual meeting of
stockholders shall elect annually the officers of the Corporation who shall
exercise such powers and perform such duties as shall be set forth in these
bylaws and as determined from time to time by the board of directors; and all
officers of the Corporation shall hold office until their successors are chosen
and qualified, or until their earlier resignation or removal. Any officer
elected by the board of directors may be removed at any time by the affirmative
vote of a majority of the board of
<PAGE> 11
directors. Any vacancy occurring in any office of the Corporation shall be
filled by the board of directors. The salaries of all officers of the
Corporation shall be fixed by the board of directors.
Section 3. Removal.
-------
Any officer may be removed by the board of directors whenever in its
judgment the best interests of the Corporation will be served thereby, but such
removal, other than for cause, shall be without prejudice to the contract
rights, if any, of the person so removed.
Section 4. Voting Securities Owned by the Corporation.
------------------------------------------
Powers of attorney, proxies, waivers of notice of meeting, consents and
other instruments relating to securities owned by the Corporation may be
executed in the name of and on behalf of the Corporation by the president or any
vice-president, and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to vote
in person or by proxy at any meeting of security holders of any corporation
which the Corporation may own securities and at any such meeting shall possess
and may exercise any and all rights and power incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present. The board of directors may, by resolution, from time
to time confer like powers upon any other person or persons.
Section 5. President.
---------
The president shall be a director of the Corporation. The president
shall be the chief executive officer. The president shall, subject to the
control of the board of directors, have general supervision of the business of
the Corporation and shall see that all orders and resolutions of the board of
directors are carried into effect. He shall execute all bonds, mortgages,
contracts and other instruments of the Corporation requiring a seal, under the
seal of the Corporation, except where required or permitted by law to be
otherwise signed and executed and except that the other officers of the
Corporation may sign and execute documents when so authorized by these bylaws,
the board of directors or the president. If so designated by the board of
directors, the president shall preside at the annual meetings and special
meetings of the stockholders. The president shall also perform such other duties
and may exercise such other powers as from time to time assigned to him by these
bylaws or by the board of directors.
Section 6. Vice-President.
--------------
At the request of the president or in his absence or in the event of
his inability or refusal to act, the vice-president or the vice-presidents if
there is more than one (in the order designated by the board of directors) shall
perform the duties of the president, and who so acting, shall have all the
powers and be subject to all the restrictions upon the president. Each
vice-president shall perform such other duties and have such other powers as the
board of directors from time to time may prescribe. The board of directors may
designate one or more vice-presidents as executive vice-president or senior
vice-president. If there be no vice-president, the board of directors shall
designate the officer of the Corporation who, in the absence of the president or
in the event of the
<PAGE> 12
inability or refusal of the president to act, shall perform the duties of the
president, and when so acting, shall have all the powers of and be subject to
all the restriction upon the president.
Section 7. Secretary.
---------
The secretary shall attend all meetings of the board of directors and
all meetings of stockholders and record all the proceedings thereat in a book or
books to be kept for that purpose; the secretary shall also perform like duties
for the standing committees when required. The secretary shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
board of directors, and shall perform such other duties as may be prescribed by
the board of directors or president, under whose supervision he shall be. If the
secretary shall be unable or shall refuse to cause to be given notice of all
meetings of the stockholders and special meetings of the board of directors, and
if there be no assistant secretary, then either the board of directors or the
president may choose another officer to cause such notice to be given. The
secretary shall have custody of the seal of the Corporation and the secretary or
any assistant secretary, if there be one, shall have authority to affix the same
to any instrument requiring it and when so affixed, it may be attested by the
signature of the secretary or the signature of any such assistant secretary. The
board of directors may give general authority to any other officer to affix the
seal of the Corporation and to attest the affixing by his signature. The
secretary shall see that all books, reports, statements, certificates and other
documents and records required by law to be kept or filed are properly kept or
filed, as the case may be.
Section 8. Treasurer.
---------
The treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the board of directors. The treasurer
shall disburse the funds of the Corporation as may be ordered by the board of
directors, taking proper vouchers for such disbursements, and shall render to
the president and the board of directors, at its regular meetings, or when the
board of directors so requires, an account of all his transactions as treasurer
and of the financial condition of the Corporation. If required by the board of
directors, the treasurer shall give the Corporation a bond in such sum and with
such surety or sureties as shall be satisfactory to the board of directors for
the faithful performance of the duties of his office and for the restoration to
the Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
Section 9. Assistant Secretaries.
---------------------
Except as may be otherwise provided in these bylaws, assistant
secretaries, if there be any, shall perform such duties and have such powers as
from time to time may be assigned to them by the board of directors, the
president, any vice-president, if there be one, or the secretary, and in the
absence of the secretary or in the event of his disability or refusal to at,
shall perform the duties of the secretary, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the secretary.
<PAGE> 13
Section 10. Assistant Treasurers.
--------------------
Assistant treasurers, if there be any, shall perform such duties and
have such powers as from time to time may be assigned to them by the board of
directors, the president, any vice-president, if there be one, or the treasurer,
and in the absence of the treasurer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the treasurer. If required
by the board of directors, an assistant treasurer shall give the Corporation a
bond in such sum and with such surety or sureties as shall be satisfactory to
the board of directors for the faithful performance of the duties of his office
and for the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control belonging
to the Corporation.
Section 11. Other Officers.
--------------
Such other officers as the board of directors may choose shall perform
such duties and have such powers as from time to time may be assigned to them by
the board of directors. The board of directors may delegate to any other officer
of the Corporation the power to choose such other officers and to prescribe
their respective duties and powers.
ARTICLE VI
STOCK
Section 1. Form of Certificates.
--------------------
Every holder of stock in the Corporation shall be entitled to have a
certificate signed, in the name of the Corporation (i) by the president or a
vice-president and (ii) by the treasurer or an assistant treasurer, or the
secretary or an assistant secretary of the Corporation, certifying the number of
shares owned by him in the Corporation.
Section 2. Signatures.
----------
Where a certificate is countersigned by (i) a transfer agent other than
the Corporation or its employee, or (ii) a registrar other than the Corporation
or its employee, any other signature on the certificate may be a facsimile. In
case any officer whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer before such certificate is issued it may be
issued by the Corporation with the same effect as if he were such officer at the
date of issue.
Section 3. Lost Certificates.
-----------------
The board of directors may direct a new certificate to be issued in
place of any certificate theretofore issued by the Corporation alleged to have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate of stock to be lost, stolen or destroyed.
When authorizing such issue of a new certificate, the board of directors may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen
<PAGE> 14
or destroyed certificate, or his legal representative, to advertise the same in
such manner as the board of directors shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
Section 4. Transfers.
---------
Stock of the Corporation shall be transferable in the manner prescribed
by law and in these bylaws. Transfers of stock shall be made on the books of the
Corporation only by the person named in the certificate or by his attorney
lawfully constituted in writing and upon the surrender of the certificate there
for, which shall be cancelled before a new certificate shall be issued.
Section 5. Record Date.
-----------
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not be
more than fifty days nor less than twenty days before the date of such meeting,
nor more than fifty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the board of directors may fix a new record date for the adjourned meeting.
Section 6. Beneficial Owners.
-----------------
The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends, and
to vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by law.
ARTICLE VII
NOTICES
Section 1. Notices.
--------
Whenever written notice is required by law, the Certificate of
Incorporation or these bylaws, to be given to any director, member of a
committee or stockholder, such notice may be given by mail, addressed to such
director, member of a committee or stockholder, at his address
<PAGE> 15
as it appears on the records of the Corporation, with postage thereon prepaid,
and such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given personally
or by telegram, telex or cable.
Section 2. Waivers of Notice.
-----------------
Whenever any notice is required by law, the Certificate of
Incorporation or these bylaws, to be given to any director, member of a
committee or stockholder, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends.
---------
Dividends upon the common stock of the Corporation, subject to the
provisions of the Certificate of Incorporation if any, may be declared by the
board of directors at any regular or special meeting, and may be paid in cash,
in property, or in shares of the capital stock.
Section 2. Disbursements.
-------------
All checks or demands for money and notes of the Corporation shall be
signed by such officer or officers or such other person or persons as the board
of directors may from time to time designate.
Section 3. Fiscal Year.
-----------
The fiscal year of the Corporation shall be fixed by resolution of the
board of directors.
Section 4. Corporate Seal.
--------------
The corporation seal shall have been inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
<PAGE> 16
ARTICLE IX
AMENDMENTS
Section 1. Amendments to Bylaws.
--------------------
These bylaws may be altered, amended or repealed, in whole or in part,
or new bylaws may be adopted by the stockholders or by the board of directors,
provided, however, that notice of such alteration, amendment, repeal or adoption
of new bylaws be contained in the notice of such meeting of stockholders or
board of directors as the case may be. All such amendments must be approved by
either the holders of at least two-thirds of the outstanding capital stock
entitled to vote thereon or by at least two-thirds of the entire board of
directors then in office.
Section 2. Entire Board of Directors.
-------------------------
As used in this Article IX and in these bylaws generally, the term
"entire board of directors" means the total number of directors which the
Corporation would have if there were no vacancies.
ARTICLE X
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND AGENTS
Section 1. Scope of Indemnification - Proceedings in General.
------------------------- ----------------------
(a) Every person who is or was a director, officer or employee
of the Corporation or a wholly owned direct or indirect subsidiary of the
Corporation, or is or was, at the request or direction of the Corporation, a
director, officer or employee of any other corporation, partnership, trust,
venture, or other entity or enterprise, including any employee benefit plan,
shall be indemnified by the Corporation against any and all liabilities,
judgments, fines and reasonable settlements, costs, expenses and attorneys' fees
incurred in any actual, threatened or potential proceeding, whether civil,
criminal, administrative or investigative, including any appeal, review,
rehearing or related proceeding, except to the extent that such indemnification
is limited by Delaware law and the limitations of such law cannot be varied by
contract or bylaw.
(b) Every person who is or was a trustee, agent or advisor of
the Corporation or a wholly owned direct or indirect subsidiary of the
Corporation, and who is not also a director, officer or employee of the
Corporation or a wholly owned direct or indirect subsidiary of the Corporation,
may, in the discretion of the Board, be indemnified by the Corporation against
any and all liabilities, judgments, fines and reasonable settlements, costs,
expenses and attorneys' fees incurred in any actual, threatened or potential
proceeding, whether civil, criminal, administrative or investigative, including
any appeal, review, rehearing or related proceeding,
<PAGE> 17
except to the extent that such indemnification is limited by Delaware law and
the limitations of such law cannot be varied by contract or by law.
Section 2. Advance of Expenses.
-------------------
(a) Prior to the final disposition of a proceeding, the
Corporation shall promptly indemnify a person for expenses incurred in
connection with the proceeding where it reasonably appears to the Board that the
person satisfies, or will satisfy, the conditions expressed in Section 1(a) of
this Article, provided that the person makes a written request for such
indemnification and agrees to repay such amount if such payment is unlawful
under Delaware law and the limitations of such law cannot be modified by
contract or bylaw.
(b) If a person satisfies the conditions of the above Section
2(a) except that such person's eligibility for indemnification is dependent on
Section 1(b) of this Article rather than Section 1(a) of this Article, the
Corporation may, in the discretion of the Board, advance expenses to such person
as provided in Section 2(a) of this Article in connection with a proceeding
prior to the final disposition of such proceeding.
Section 3. Miscellaneous.
-------------
In the event of the death of any person having a right of
indemnification under the provisions of this Article, such right shall inure to
the benefit of the heirs, executors, administrators and personal representatives
of such person. If any part of this Article should be found to be invalid or
ineffective in any proceeding, the validity and effect of the remaining
provisions shall not thereby be affected.
Section 4. Indemnification Not Exclusive.
-----------------------------
The foregoing right of indemnification shall not be exclusive of any
other right to which those indemnified may be entitled, and the Corporation may
provide additional indemnity and rights to its directors, officers, employees,
trustees or agents.
Section 5. Insurance.
---------
The Corporation may, as the Board may direct, purchase and maintain
insurance on behalf of any person who is or at any time has been, at the request
or direction of the Corporation, a director, officer, employee, trustee or agent
of the Corporation or of any other corporation, partnership, trust, venture, or
other entity or enterprise, including any employee benefit plan, against any
liability asserted against and incurred by such person in any such capacity or
arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under the
provisions of this Article.
<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
that 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. First Franklin's mission is
to maximize the value of the Company for shareholders by exceeding the
expectations of its customers and the communities it serves. This mission will
only be accomplished by adhering to the following values:
1. We will exceed the expectations of our customers regarding service
and products.
2. Our success will be achieved through our employees' efforts.
3. Shareholder satisfaction enables us to continue serving our
customers.
4. We have an obligation to support the communities we serve.
5. We will combine business success with integrity.
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 six 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 receives a portion of the sales commissions earned on these products.
In January 2000, Franklin began offering an internet-based banking system which
allows our customers to transfer funds between financial institutions, pay
bills, transfer funds between Franklin accounts, download account and
transaction information into financial management software programs and inquire
about account balances and transactions.
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 that, 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 Services 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 Direct Teller 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.
4
<PAGE> 2
In September 1999, management and the Board of Directors reviewed the Company's
strategic plan and established various strategic objectives for the next two
years. The primary objectives of this plan are asset growth, profitability,
independence, capital adequacy and enhancing shareholder value. These objectives
will be accomplished through loan growth, the use of technology to improve
efficiency and/or customer service, an enhanced marketing effort to take full
advantage of the opportunities that exist in the marketplace, and expansion
through the addition of branch and/or loan origination offices.
During the fourth quarter of 1999, Franklin closed its branch office located at
45 East Fourth Street, Cincinnati, Ohio following an internal analysis that
indicated that the cost of operating that branch was not justified by the number
of customers being served. Deposits held at that branch are being serviced by a
branch located about five miles from the closed location.
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.
ASSET/LIABILITY MANAGEMENT
Asset and liability management is the process of balancing the risk and the
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 and 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 its assets and liabilities, managing
interest rate risk, offering 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 level of earnings 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 ad-
vances, mature or reprice more or less frequently, or on a different basis, than
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.
In the current interest rate environment, the Company is subject to significant
interest rate risk. In the low interest rate environment that prevailed
throughout much of the 1990s, Franklin, like many financial institutions, was
not able to attract a significant amount of long-term deposits as customers
opted to pursue short-term investments so they would be poised to take advantage
of rates when they did rise. As a result, Franklin has continued to experience a
shortening of the maturities of its liabilities. The low rates had the opposite
effect on Franklin's assets, as consumers took advantage of the low rates to
lock-in long-term mortgages. Although Franklin has sold some of its fixed-rate
mortgages in recent years, timing considerations and other market conditions
have not always been conducive to a sale. Consequently, Franklin emerged from
the 1990s with a significant mismatch between the repricing terms of its assets
and liabilities. At December 31,1999, Franklin's interest rate risk position is
classified as "High Risk" under OTS guidelines.
5
<PAGE> 3
The following table utilizes the "net portfolio value" methodology to illustrate
the impact on Franklin's net interest income of specified interest rate
scenarios:
<TABLE>
<CAPTION>
NET INTEREST INCOME NET PORTFOLIO VALUE
------------------- -------------------
CHANGE IN
INTEREST RATES ESTIMATED $ CHANGE % CHANGE ESTIMATED NPV POLICY
(BASIS POINTS) $ VALUE FROM CONSTANT FROM CONSTANT $ VALUE RATIO GUIDELINES
- -------------- ------- ------------- ------------- ------- ----- ----------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C> <C>
+300 $ 5,424 $(1,302) (19.36%) $ 129 0.06% 5.50%
+200 5,921 (805) (11.97%) 5,984 2.57% 6.50%
+100 6,373 (353) (5.25%) 11,718 4.88% 7.25%
0 6,726 0 0.00% 16,922 6.84% 8.00%
-100 6,961 235 3.49% 20,951 8.27% 8.75%
-200 6,966 240 3.57% 23,767 9.20% 9.50%
-300 6,759 33 0.49% 26,061 9.92% 10.50%
</TABLE>
Net portfolio value (NPV) is the difference between the present value of
Franklin's interest sensitive assets and the present value of its interest
sensitive liabilities. With the NPV methodology, Franklin attempts to measure
the change in net interest income that would result from a change in its net
portfolio value in the event of an instantaneous shift in the Treasury yield
curve of plus or minus 100, 200 and 300 basis points. The changes in the NPV and
net interest income shown in the table 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, but they are indicators of a magnified sensitivity to
changes in rates.
Franklin has developed a plan to improve its interest rate sensitivity. One
component of this plan is to increase Franklin's capital position, which
Franklin has addressed by suspending the payment of dividends to the Company in
2000 and obtaining additional capital from the Company. Another component of the
plan is to lengthen the maturities of its liabilities, which Franklin will
undertake by replacing short-term borrowings with long-term borrowings and by
emphasizing three-year and five-year certificates of deposit by pricing those
products more attractively. The third component of the plan is to shorten the
maturities of its assets. In this regard, the majority of fixed-rate mortgages
originated will be sold, including some through correspondent brokers with
servicing released. More emphasis will be placed on originating one and three
year adjustable-rate mortgages, and loans originated on commercial and
multi-family properties will have a balloon payment due in five years or less.
More emphasis will also be placed on the origination of home equity lines of
credit, and only adjustable-rate second mortgages will be offered.
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.
Another measure of the sensitivity of earnings to interest rate changes is 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 "gap" 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, 1999. As shown below, the one year cumulative gap is $(35.59)
million. 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.
6
<PAGE> 4
<TABLE>
<CAPTION>
3 MONTHS 4 TO 6 7 TO 12 1 TO 3 3 TO 5 5 TO 10 10 TO 20 >20
OR LESS MONTHS MONTHS YEARS YEARS YEARS YEARS YEARS TOTAL
------- ------ ------ ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS: (IN THOUSANDS)
Real estate loans;
One- to four-family
Adjustable rate $10,732 $9,886 $8,615 $11,146 $40,379
Fixed rate 2,922 2,847 5,479 19,290 $15,663 $27,293 $15,973 $3,635 93,102
Construction loans 1,495 154 556 2,205
Multi-family and non-residential
Adjustable rate 1,723 1,706 3,363 7,499 14,291
Fixed rate 451 441 853 3,063 2,569 4,736 1,214 13,327
Consumer loans 2,864 137 252 728 3,981
Mortgage-backed securities 14,258 7,666 11,770 7,374 2,735 5,032 4,481 53,316
Investments 3,530 25 720 2,249 12,302 4,753 23,579
Total rate sensitive assets $37,975 $22,837 $30,913 $49,820 $23,216 $49,363 $26,421 $3,635 $244,180
LIABILITIES:
Fixed maturity deposits $24,726 $35,995 $34,002 $38,372 $12,112 $145,207
Transaction accounts 1,067 993 1,784 5,044 2,837 $2,782 $817 $49 15,373
Money market deposit accounts 598 556 1,000 2,827 1,590 1,559 458 27 8,615
Passbook accounts 1,449 1,349 2,423 6,853 3,855 3,780 1,110 66 20,885
Borrowings 15,444 2,196 3,730 7,249 6,273 3,130 838 38,860
Total rate sensitive liabilities $43,284 $41,089 $42,939 $60,345 $26,667 $11,251 $3,223 $142 $228,940
GAP INFORMATION:
Cumulative gap ($5,309) ($23,561) ($35,587) ($46,112) ($49,563) ($11,451) $11,747 $15,240
Cumulative gap as a percentage
of total assets (2.13%) (9.46%) (14.29%) (18.52%) (4.60%) 4.72% 6.12%
</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 8% to 36% (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 32%
depending on the stated interest rate and contractual maturity of the loan; (iv)
the decay rate on deposit accounts is 0% to 33% per year; and (v) fixed-rate
certificates of deposit will not be withdrawn prior to maturity.
A prolonged period of rising interest rates will adversely affect the Company's
earnings and make it difficult for Franklin to improve its interest rate risk
position. In addition to the earnings impact, the high risk classification could
lead to regulatory consequences, including limits on the amount of funds that
Franklin may dividend to the Company. Although the Company does not anticipate
that it will need dividends from Franklin during 2000, a prolonged restriction
could adversely affect the amount of funds available to the Company for stock
repurchases and distributions to shareholders in future years.
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, borrowers with
aggregate loans outstanding exceeding $1,000,000, 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.
7
<PAGE> 5
Non-performing assets include loans that 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.
AT DECEMBER 31,
1999 1998
---- ----
(IN THOUSANDS)
Non-accruing loans $481 $ 585
Accruing loans ninety days or
more past due 458 806
Repossessed assets
Renegotiated loans 244
---- ------
Total non-performing assets $939 $1,635
==== ======
As indicated by the table above, non-performing assets decreased $696,000 during
1999 due to enhanced collection efforts, which resulted in a $348,000 decrease
in the amount of loans accruing but delinquent more than ninety days and a
$104,000 decrease in non-accruing loans. The renegotiated loan included at
December 31, 1998 was paid-off during 1999. During 2000, the Company will
continue to monitor the level of these assets and strive to reduce them further.
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;
the fair market value of the loan collateral is significantly below the current
loan balance, and there is no near-term prospect for improvement.
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.
8
<PAGE> 6
FOR THE YEAR ENDED DECEMBER 31,
1999 1998
---- ----
(IN THOUSANDS)
Beginning balance $1,092 $1,015
Charge-offs
One- to four-family 10
Multi-family
Non-residential
Consumer 4
14
Recoveries
One- to four-family 1 1
Multi-family
Non-residential
Consumer 2
1 3
Net charge-offs (recoveries) 13 (3)
Additions (credit) charged to operations (103) 74
Ending balance $976 $1,092
Ratio of net charge-offs (recoveries) to
average loans outstanding 0.008% (0.002%)
Ratio of net charge-offs (recoveries) to
average non-performing assets 1.01% (0.20%)
RESULTS OF OPERATIONS
Net income for 1999 was $1.41 million. This represents a 0.59% return on average
assets and a 6.95% return on average stockholders' equity. Book value per share
at December 31, 1999 was $12.12. Net income for the year ended December 31, 1998
was $1.83 million. The returns on average assets and average equity for 1998
were 0.78% and 8.62%, respectively. Net income for the year ended December 31,
1997 was $1.69 million, which represents a return on average assets of 0.74% and
a return on average stockholders' equity of 8.24%. The decline in 1999 net
income reflects a $460,000 decrease in income on the sale of investments and
loans and an increase in operating expenses.
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 bal- ance. The table
indicates that net interest income declined slightly during 1999 to $5.87
million from $5.90 million in 1998 due to a decrease in the interest rate spread
from 2.23% for 1998 to 2.19% for 1999.
9
<PAGE> 7
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------------------
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) $159,053 $11,857 7.45% $151,989 $11,895 7.83% $153,130 $12,157 7.94%
Mortgage-backed securities(2) 52,325 2,907 5.56% 40,854 2,408 5.89% 36,906 2,489 6.74%
Investments(2) 20,126 1,235 6.14% 32,985 2,164 6.56% 28,974 1,701 5.87%
FHLB stock 1,886 132 7.00% 1,758 126 7.17% 1,757 126 7.17%
-------- ------- -------- ------- -------- -------
Total interest-earning
assets $233,390 $16,131 6.91% $227,586 $16,593 7.29% $220,767 $16,473 7.46%
======== ======= ======== ======= ======== =======
INTEREST-BEARING LIABILITIES:
Demand and NOW deposits $ 23,797 $ 513 2.16% $ 22,256 $ 473 2.13% $ 23,202 $ 494 2.13%
Savings deposits 22,052 613 2.78% 22,485 620 2.76% 22,799 631 2.77%
Certificates of deposit 146,385 7,871 5.38% 157,401 9,085 5.77% 153,662 8,982 5.85%
FHLB advances 25,071 1,266 5.05% 9,050 512 5.66% 6,119 395 6.46%
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities $217,305 $10,263 4.72% $211,192 $10,690 5.06% $205,782 $10,502 5.10%
======== ======= ======== ======= ======== =======
Net interest income $ 5,868 $ 5,903 $ 5,971
======= ======= =======
Net interest rate spread 2.19% 2.23% 2.36%
==== ==== ====
Net earning assets $ 16,085 $16,394 $ 14,985
======== ======== ========
Net yield on average
interest-earning assets 2.51% 2.59% 2.70%
======= ==== ====
Average interest-earning
assets to average
interest-bearing liabilities 1.07% 1.08% 1.07%
======= ======= =======
</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 1999, net interest income decreased $35,000 compared to a $68,000
decrease during 1998. The income earned on assets decreased $462,000, due to a
decline in the rates earned on total interest-earning assets from 7.29% to 6.91%
while the average interest-earning assets increased $5.80 million. The decline
in the yield on interest-earning assets reflects a decline in the yield on loans
from 7.83% to 7.45% and a decline in the yield on mortgage-backed securities
from 5.89% to 5.56%. During the same period, however, interest expense decreased
$427,000 due to a decrease in the average cost of funds from 5.06% to 4.72% and
an increase in average interest-bearing liabilities of $6.11 million. The
reduction in the average cost of funds reflects a decline in the cost of
certificates from 5.77% to 5.38% and a decline in the cost of FHLB advances from
5.66% to 5.05%.
<TABLE>
<CAPTION>
1999 VS 1998 1998 VS 1997 1997 VS 1996
------------ ------------ ------------
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)
Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ATTRIBUTABLE TO:
Loans receivable(1) $1,786 $(1,824) $ (38) $(90) $(172) $(262) $ 554 $(144) $ 410
Mortgage-backed securities 627 (128) 499 455 (536) (81) (208) 49 (159)
Investments (797) (132) (929) 250 213 463 343 89 432
FHLB stock 9 (3) 6 5 3 8
------ ------- ------- ---- ----- ----- ----- ----- -----
Total interest-earning assets $1,625 $(2,087) $ (462) $615 $(495) $ 120 $ 694 $ (3) $ 691
====== ======= ======= ==== ===== ===== ===== ===== =====
INTEREST EXPENSE ATTRIBUTABLE TO:
Demand and NOW deposits $ 33 $ 7 $ 40 $(20) $ (1) $ (21) $ (11) $ (23) $ (34)
Savings deposits (12) 5 (7) (9) (2) (11) (54) 1 (53)
Certificates of deposit (614) (599) (1,213) 213 (110) 103 810 58 868
FHLB advances 802 (49) 753 158 (41) 117 (63) (1) (64)
------ ------- ------- ---- ----- ----- ----- ----- -----
Total interest-bearing
liabilities $ 209 $ (636) $ (427) $342 $(154) $ 188 $ 682 $ 35 $ 717
====== ======= ======= ==== ===== ===== ===== ===== =====
Increase (decrease) in
net interest income $1,416 $(1,451) $ (35) $273 $(341) $ (68) $ 12 $ (38) $ (26)
====== ======= ======= ==== ===== ===== ===== ===== =====
</TABLE>
(1) Includes non-accruing loans
10
<PAGE> 8
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.
AT DECEMBER 31,
-----------------------------
Weighted average yield on: 1999 1998 1997
---- ---- ----
Loans receivable(1) 7.44% 7.57% 7.84%
Mortgage-backed securities 6.42 6.18 6.84
Investments(2) 6.29 5.82 6.41
FHLB stock 7.00 7.00 7.25
Combined weighted average yield on
interest-earning assets 7.11 7.03 7.46
Weighted average rate paid on:
Demand and NOW deposits 2.34 2.09 2.22
Savings deposits 2.75 2.75 2.75
Certificates of deposit 5.33 5.47 5.74
Borrowings 5.64 5.30 6.45
Combined weighted average rate paid
on interest-bearing liabilities 4.81 4.79 5.05
Interest rate spread 2.30% 2.24% 2.41%
(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, and the composition of the loan portfolio and the
current level of loan loss reserves. During the Second Quarter of 1999,
additions to loss reserves were reduced by $163,300 due to the recapture of a
specific reserve established in 1990 and 1991 against a renegotiated loan
secured by a 50 unit motel located in Cincinnati, Ohio as a result of an
unanticipated payoff of the loan. Excluding this recapture, 1999 charges against
current operation were $60,000. Charges against current operations during 1998
and 1997 for loan loss reserves were $73,500 and $84,000, respectively. Assets
classified as substandard and loss at December 31, 1999 decreased 32.75% to
$1.15 million and non-performing assets declined by 42.57% to $939,000. It is
management's opinion that the level of reserves at December 31, 1999 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 provision 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' judgment of
information available to them at the time of their examinations.
NONINTEREST INCOME. Noninterest income was $645,000 for 1999, compared to
$1,124,000 for 1998 and $618,000 for 1997. Current year income included profits
of $67,000 on the sale of mortgage and student loans, profits on the sale of
investments of $23,000, service fees of $232,000 earned on checking and money
market accounts, $8,000 in income from Madison and $47,000 in income from
DirectTeller. Profits on the sale of loans and investments were $550,000 in 1998
and $216,000 in 1997. Noninterest income during 1998 and 1997 included service
fees on checking and money market accounts of $236,000 and $198,000,
respectively.
NONINTEREST EXPENSE. Noninterest expense was $4.52 million; $4.21
million and $4.02 million for the years ended December 31, 1999, 1998 and 1997,
respectively. As a percentage of average assets, total noninterest expenses were
1.89%, 1.80%, and 1.76% for the three years. The following table shows the major
noninterest expense items and their percent of change during 1999 and 1998.
11
<PAGE> 9
PERCENT PERCENT
INCREASE INCREASE
1999 (DECREASE) 1998 (DECREASE) 1997
---- ---------- ---- ---------- ----
(DOLLARS IN THOUSANDS)
Compensation $1,788 12.2% $1,594 8.6% $1,468
Employee benefits 350 5.4% 332 (1.2%) 336
Office occupancy 638 (2.0%) 651 9.4% 595
FDIC insurance 116 (6.5%) 124 22.8% 101
Data processing 247 3.3% 239 6.2% 225
Marketing 196 76.6% 111 16.8% 95
Professional fees 99 (6.6%) 106 (36.5%) 167
Supervisory expense 102 4.1% 98 (4.9%) 103
Taxes, other than income 194 (5.4%) 205 4.1% 197
Other 790 5.3% 750 2.9% 729
------ --- ------ --- ------
TOTAL $4,520 7.4% $4,210 4.8% $4,016
====== === ====== === ======
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 $167,000, $243,000 and $157,000 during
1999, 1998 and 1997, respectively. The 1999 increase in compensation is due in
part to the reduction in these capitalized costs, which was caused by a
reduction in number of loans originated. Supervisory expense increased due to an
increase in the annual assessment from the State of Ohio. The increase in
marketing expense reflects increased advertising promoting loan and deposit
products.
Provision for Federal Income Taxes. Provisions for federal income taxes were
$685,560, $909,148, and $800,482 in fiscal 1999, 1998 and 1997, respectively.
The effective federal income tax rates for the years ended December 31, 1999,
1998, and 1997 were 32.7%, 33.2% and 32.2%, 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 $4.61 million to $22.88
million at December 31, 1999.
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, 1999 the Company had a $1.37 million unrealized
loss on investments and mortgage-backed securities classified as
available-for-sale.
During 1999 the Company sold $2.89 million of mortgage-backed securities at a
profit of $21,000. The proceeds from the sale were reinvested in higher yielding
agency securities. In 1998, $21.30 million of available-for-sale agency and
mortgage-backed securities were sold at a profit of $247,000. Proceeds from the
sales were reinvested in adjustablerate mortgage-backed securities. The agency
securities were sold because they had call provisions that were likely to be
exercised.
The change in cash and cash equivalents is caused by one of three activities:
operations, investing or financing.
12
<PAGE> 10
These activities are summarized below for the years ended December 31, 1999 and
1998.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
---- ----
(IN THOUSANDS)
Operating activities:
Net income $ 1,411 $ 1,833
Adjustments to reconcile net income
to net cash provided by
operating activities 870 (776)
-------- -------
Net cash provided by operating activities 2,281 1,057
Net cash used in investing activities (16,389) (7,075)
Net cash provided by financing activities 9,427 8,397
-------- -------
Net (decrease) increase in cash and cash equivalents (4,681) 2,379
Cash and cash equivalents at beginning of year 8,369 5,990
-------- -------
Cash and cash equivalents at end of year $ 3,688 $ 8,369
======== =======
Operating activities include the sale of fixed-rate single-family mortgage loans
of $6.54 million during 1999 and $17.36 million during 1998. The sale of
fixed-rate loans allows Franklin to attempt 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 1999,
interest rates on fixed-rate loans increased substantially, so consumer demand
for fixed-rate loans declined and the demand for adjustable-rate loans began to
increase. Franklin has an agreement to sell all student loans which enter
repayment to a third party. Sales of $210,300 at a profit of $3,800 occurred
during 1999 compared to sales of $225,000 at a profit of $6,200 during 1998.
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, 1999 totaled $57.48 million compared to $59.87 million during
fiscal 1998. Loan disbursements, including loans originated for sale, during
1999 were $57.30 million compared to $60.74 million during 1998. The decrease in
loan repayments and disbursements during 1999 reflects an increase in interest
rates during the second half of the year. The Company also purchased $24.99
million of mortgage-backed securities during 1999 and $40.91 million during
1998. Investment securities of $10.38 million were purchased during 1999.
Maturities of investment securities during the same period totaled $9.24
million. This compares to purchases of $31.42 million and maturities and sales
of $42.22 million during 1998. The reduction in purchases and maturities is the
result of higher interest rates during the second half of 1999, which caused the
amount of securities, called prior to maturity to decline.
Financing activities include deposit account flows, the use of borrowed funds
and the payment of dividends. Deposits decreased $10.59 million to $191.67
million at December 31, 1999 from $202.26 million at December 31, 1998. Net of
interest credited, deposits decreased by $18.56 million during 1999 as compared
to an $8.96 million decrease during 1998. During 1999 the Company attempted to
lengthen the maturity of its certificates. As a result of this strategy,
six-month certificates declined $23.90 million during the year. The table below
sets forth the deposit flows by type of account, including interest credited,
during 1999 and 1998.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
---- ----
(IN THOUSANDS)
Passbook deposits $ (2,334) $ 666
NOW / Super NOW deposits (1,289) 3,245
MMDA deposits 2,089 (1,263)
Total (1,534) 2,648
Certificates of deposit:
7-31 day 28 101
91 day 29 117
Six month (23,902) 3,149
One year 7,313 (14,419)
Eighteen month 3,726 4,301
Two year (6,609) 4,208
Three year 9,415 3,835
Five year 918 (4,684)
Jumbo certificates 94 965
Other (66) (166)
-------- --------
Total (9,054) (2,593)
-------- --------
Total deposit (decrease) increase $(10,588) $ 55
======== ========
13
<PAGE> 11
At December 31, 1999 Franklin had outstanding Federal Home Loan Bank ("FHLB")
advances of $37.11 million. See Note 7 of the Notes to the Consolidated
Financial Statements for a list of the outstanding advances by maturity date.
Subject to certain limitations, based on its current investment in FHLB stock,
Franklin is eligible to borrow an additional $2.31 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, 1999, Franklin's
regulatory liquidity was 33.98%.
At December 31, 1999 Franklin had outstanding commitments to originate or
purchase $4.16 million of mortgage loans or mortgage-backed securities, as
compared to $4.11 million at December 31, 1998. During the next twelve months
approximately $94.72 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 $1.18 million during
1999 from $20.94 million at December 31, 1998 to $19.76 million at the end of
1999. Book value per share decreased to $12.12 at December 31, 1999 from $12.29
at the end of 1998. The decrease in stockholders' equity is primarily the result
of net income for the year of $1.41 million offset by an increase in unrealized
losses on available-for-sale securities of $999,000, dividends declared of
$495,000 and purchases of treasury stock of $1,103,000. As a percentage of total
assets, the Company's stockholders' equity was 7.90% and 8.71% at December 31,
1999 and 1998 respectively.
Dividends per share of $0.30 and $0.292 were declared in 1999 and 1998,
respectively, resulting in payments of $495,000 in 1999 and $509,000 in 1998.
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.
DECEMBER 31, 1999
-----------------
CAPITAL STANDARD ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
------ -------- ------ ------ -------- ------
(DOLLARS IN THOUSANDS)
Core $17,645 $9,995 $7,650 7.06% 4.00% 3.06%
Risk-based 18,458 9,246 9,212 15.97 8.00 7.97
RECENT ACCOUNTING PRONOUNCEMENTS
The following represent accounting pronouncements, which must be adopted by the
Company in future years, in order to be in compliance with Generally Accepted
Accounting Principles.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("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, 2000. Management does not believe that the
adoption of this standard will impact the Company because, at this time, the
Company does not hold any of the instruments covered by the standard.
14
<PAGE> 12
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 29, 2000 there were approximately 417 stockholders of record, not
including those shares held in nominee or street name through various brokerage
firms or banks. 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 29, 2000 First Franklin's closing sale price as
reported on the Nasdaq National Market was $8.88.
STOCK PRICES
QUARTER ENDED: LOW HIGH
-------------- --- ----
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
March 31, 1999 12.00 15.25
June 30, 1999 12.25 15.50
September 30, 1999 11.50 18.00
December 31, 1999 11.25 14.13
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 $0.30 per share during 1999 and $0.292 per share during
1998.
The principal source of earnings for the Company on an unconsolidated basis is
dividends paid by Franklin. The OTS imposes various restrictions on the ability
of savings institutions, such as Franklin, to make capital distributions.
Capital distributions include, without limitation, payments of cash dividends,
repurchases and certain other acquisitions by an institution of its shares and
payments to stockholders of another institution in an acquisition of such other
institution. An application must be submitted and approval obtained (i) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the institution's retained net
income for that year to date, plus the retained net income for the preceding two
years; (ii) if the institution will not be at least adequately capitalized
following the capital distribution; (iii) if the proposed distribution will
violate a prohibition contained in any applicable statute, regulation or
agreement between the institution and the OTS (or FDIC), or violate a condition
imposed in an OTS approved application or notice. If the subsidiary of a holding
company is not required to file an application, it must file a notice with the
OTS. During 1999, Franklin did not pay dividends to the Company compared to
$1,582,000 during 1998. The 1998 dividend payment represented approximately
ninety percent of Franklin's 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 Delaware 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 24, 2000 at
3:00 p.m.
FORM 10-KSB:
The Company's 1999 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
Or E-mail: [email protected]
VISIT OUR WEBSITE:
www.franklinsavings.com
15
<PAGE> 13
[CLARK, SCHAEFER, HACKETT & CO. LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
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, 1999 and 1998 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, 1999.
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, 1999 and 1998 and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
January 21, 2000
16
<PAGE> 14
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash, including certificates of deposit and other
interest-earning deposits of $205,000 and $8,060,000
at December 31, 1999 and 1998, respectively $ 3,687,970 8,369,318
Investment securities:
Securities available-for-sale, at market value (amortized
cost of $20,189,885 and $19,041,099 at December 31, 1999
and 1998, respectively) 19,196,974 19,125,146
Mortgage-backed securities:
Securities available-for-sale, at market value (amortized
cost of $39,719,308 and $43,462,293 at December 31, 1999
and 1998, respectively) 39,342,286 43,522,235
Securities held-to-maturity, at amortized cost (market value
of $13,336,225 and $12,468,794 at December 31, 1999
and 1998, respectively) 13,596,266 12,355,168
Loans receivable, net 167,600,890 150,179,277
Real estate owned, net - -
Investment in Federal Home Loan Bank
of Cincinnati stock, at cost 1,971,200 1,788,700
Accrued interest receivable:
Investment securities 178,145 267,059
Mortgage-backed securities 317,750 315,750
Loans receivable 815,340 804,341
Property and equipment, net 1,942,129 2,038,783
Other assets 1,556,273 1,549,036
------------- -----------
$ 250,205,223 240,314,813
============= ===========
LIABILITIES
Savings accounts $ 191,672,617 202,261,392
Federal Home Loan Bank advances 37,110,448 15,575,801
Advances by borrowers for taxes and insurance 1,170,508 1,091,360
Other liabilities 496,154 445,150
------------- -----------
Total liabilities 230,449,727 219,373,703
------------- -----------
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 1999 and 1998 13,406 13,406
Additional paid-in capital 6,189,237 6,189,237
Treasury stock, at cost - 380,494 and 306,494 shares
in 1999 and 1998, respectively (3,733,041) (2,630,422)
Retained earnings, substantially restricted 18,190,050 17,273,849
Accumulated other comprehensive income:
Unrealized gain (loss) on available-for-sale securities,
net of taxes of ($465,775) and $48,950 at
December 31, 1999 and 1998, respectively (904,156) 95,040
------------- -----------
Total stockholders' equity 19,755,496 20,941,110
------------- -----------
$ 250,205,223 240,314,813
============= ===========
</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,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(Interest income:)Loans receivable $11,856,552 11,894,693 12,156,897
Investment securities 1,268,353 1,888,477 1,468,581
Mortgage-backed securities 2,907,019 2,407,935 2,489,398
Other interest income 99,068 401,906 358,002
----------- --------- ---------
16,130,992 16,593,011 16,472,878
----------- --------- ---------
(Interest expense:)Savings accounts 8,996,929 10,178,360 10,106,866
Borrowed funds 1,266,062 511,986 395,207
----------- --------- ---------
10,262,991 10,690,346 10,502,073
----------- --------- ---------
NET INTEREST INCOME 5,868,001 5,902,665 5,970,805
Provision (credit) for loan losses (103,300) 73,500 84,000
NET INTEREST INCOME AFTER
----------- --------- ---------
PROVISION FOR LOAN LOSSES 5,971,301 5,829,165 5,886,805
----------- --------- ---------
Noninterest income:
Service fees on NOW accounts 231,757 235,653 198,120
Gain on loans sold 66,738 302,727 215,758
Gain on sale of investments 23,399 247,289 --
Other income 323,211 338,021 204,240
----------- --------- ---------
645,105 1,123,690 618,118
----------- --------- ---------
Noninterest expense:
Salaries and employee benefits 2,137,766 1,925,512 1,804,314
Occupancy 637,530 650,906 550,511
Federal deposit insurance premiums 116,475 124,398 101,098
Service bureau 247,341 238,584 225,237
Advertising 196,244 111,394 95,065
Taxes other than income taxes 194,260 204,711 196,734
Loss on sale of investment securities - - 13,465
Other 989,945 954,830 1,029,743
----------- --------- ---------
4,519,561 4,210,335 4,016,167
----------- --------- ---------
INCOME BEFORE FEDERAL INCOME TAXES 2,096,845 2,742,520 2,488,756
Provision for federal income taxes 685,560 909,148 800,482
----------- --------- ---------
NET INCOME $ 1,411,285 1,833,372 1,688,274
=========== ========= =========
NET INCOME PER COMMON SHARE
Basic $ 0.85 1.05 0.95
=========== ==== ====
Diluted $ 0.85 1.05 0.92
=========== ==== ====
</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,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Income $ 1,411,285 1,833,372 1,688,274
Other comprehensive income, net of tax
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) during the year (983,763) (161,448) 193,297
Less: Reclassification adjustment for (gains)
losses on investments securities
included in net income (15,433) (163,211) 8,887
----------- --------- ---------
COMPREHENSIVE INCOME $ 412,089 1,508,713 1,890,458
=========== ========= =========
</TABLE>
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, 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 ($.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 due to stock split (277)
Dividends declared ($.292) per common share (508,587)
Change in net unrealized gains on securities
available-for-sale, net of
deferred tax of $167,250 (324,659)
Purchase of treasury stock (1,286,652)
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
=========== ========= ========== ======= ==========
Dividends declared ($.30) per common share (495,084)
Change in net unrealized gains on securities
available-for-sale, net of
deferred tax of $(514,725) (999,196)
Purchase of treasury stock (1,102,619)
Net income for the year ended December 31, 1999 1,411,285
----------- --------- ---------- ------- ----------
BALANCE
DECEMBER 31, 1999 $ 13,406 6,189,237 (3,733,041) (904,156) 18,190,050
=========== ========= ========== ======= ==========
</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,
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
NET INCOME $ 1,411,285 1,833,372 1,688,274
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision (credit) for loan losses (103,300) 73,500 84,000
Depreciation 170,917 175,256 166,252
Amortization 482,951 198,792 65,925
Deferred income taxes 56,733 (17,800) 12,125
Gain on sale of assets (28,201) (334,206) (56,656)
FHLB stock dividends (132,100) (125,800) (125,400)
(Increase) decrease in accrued interest receivable 75,915 46,031 (192,739)
(Increase) decrease in other assets 387,948 (617,520) (516,983)
Increase (decrease) in other liabilities 51,004 (95,243) 105,546
Other, net (74,672) (160,491) 76,703
Proceeds from sale of loans originated for sale 6,542,924 17,364,729 11,711,972
Disbursements on loans originated for sale (6,559,948) (17,284,023) (11,221,025)
------------ ---------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,281,456 1,056,597 1,797,994
------------ ---------- -----------
Cash flows from investing activities:
Principal reductions on loans
and mortgage-backed securities 57,478,441 59,867,475 39,291,074
Disbursements on mortgage and
other loans originated for investment (50,735,285) (43,458,689) (36,797,346)
Proceeds from sale of student loans 214,067 232,116 361,650
Purchase of investment securities:
Available-for-sale (10,384,014) (31,417,422) (35,142,886)
Proceeds from sale of investment securities:
Available-for-sale - 15,065,000 9,976,883
Proceeds from maturities of investment securities:
Available-for-sale 9,240,000 27,155,000 12,845,000
Purchase of mortgage-backed securities:
Available-for-sale (20,039,744) (40,909,711) (2,550,937)
Held-to-maturity (4,950,178)
Proceeds from sale of mortgage-backed securities:
Available-for-sale 2,910,250 6,479,291 -
Sale (purchase) of FHLB stock (50,400) 145,900 66,700
Proceeds from sale of real estate owned - - 172,956
Capital expenditures (82,258) (240,820) (257,906)
Proceeds from sale of property and equipment 9,000 6,432 11,689
------------ ---------- -----------
NET CASH USED BY
INVESTING ACTIVITIES $(16,390,121) (7,075,428) (12,023,123)
------------ ---------- -----------
</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,
-----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in deposits $(10,588,775) 55,207 7,558,413
Proceeds from sale of common stock - - 237,860
Purchase of treasury stock (1,102,619) (1,286,652) (202,575)
Payment of dividends (495,084) (508,587) (428,036)
Proceeds from (repayment of) Federal Home
Loan Bank advances, net 21,534,647 10,113,806 (960,658)
Increase in advances by borrowers
for taxes and insurance 79,148 24,090 956
------------ -------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 9,427,317 8,397,864 6,205,960
------------ -------- -------
NET INCREASE (DECREASE) IN CASH (4,681,348) 2,379,033 (4,019,169)
Cash at beginning of year 8,369,318 5,990,285 10,009,454
------------ -------- -------
CASH AT END OF YEAR $ 3,687,970 8,369,318 5,990,285
============ ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, including interest credited
to savings accounts $ 10,226,540 10,686,018 10,494,547
============ ======== =======
Income taxes $ 710,000 890,000 675,000
============ ======== =======
Supplemental disclosure of noncash activities:
Real estate acquired in settlement of loans $ - - -
============ ======== =======
Change in unrealized gain (loss) on
available-for-sale securities $ (1,513,921) (491,859) 306,258
============ ======== =======
</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
intercompany transactions have been eliminated in consolidation.
Franklin Savings is a state chartered savings and loan, operating six
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.
Deposit 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 deposit accounts.
Franklin Savings conducts a general banking business in southwestern
Ohio which consists of attracting deposits from the general public and
applying those funds to the origination of loans for residential,
consumer and nonresidential purposes. The Company's profitability is
significantly dependent on its net interest income, which is the
difference between interest income generated from interest-earning
assets (i.e. loans and investments) and the interest expense paid on
interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the
interest received or paid on these balances. The level of interest
rates paid or received by Franklin Savings can be significantly
influenced by a number of environmental factors, such as governmental
monetary policy, that are outside of management's control.
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, 1999 and 1998, the Company did not hold any
trading securities.
Gains and losses realized on the sale of investment securities are
accounted for on 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 of deferred loan origination fees and
discounts.
23
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND ACCOUNTING POLICIES, CONTINUED:
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 the process of collection. Loans that are on a
current payment status or past due less than 90 days may also be
classified as nonaccrual 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 sells loans in the secondary market. Loan sales totaled
$6,542,924 and $17,364,729 during 1999 and 1998. The amount of loans
held for sale at December 31, 1999 and 1998 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 basis 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 have been restated for the adoption of
Statement of Financial Accounting Standard (SFAS) No. 123 "Earnings Per
Share" and to account for a three for two stock split during 1998.
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.
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 affect 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, 1999
-------------------------------------------------------
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 $18,993,530 - 1,016,490 17,977,040
Obligations of states and
municipalities 1,196,355 29,507 5,928 1,219,934
----------- ------ --------- ----------
$20,189,885 29,507 1,022,418 19,196,974
=========== ====== ========= ==========
<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>
The amortized cost and estimated market value of investment securities at
December 31, 1999, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturity because issuers may have the
right to call obligations at par.
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
Available-for-sale:
Due in one year or less $ 165,061 167,236
Due after one year through five years 2,869,579 2,842,673
Due after five years through ten years 12,401,720 11,753,636
Due after ten years 4,753,525 4,433,429
----------- ----------
$20,189,885 19,196,974
=========== ==========
The detail of interest and dividends on investment securities (including
dividends on FHLB stock) is as follows:
YEARS ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
Taxable interest income $1,082,835 1,696,177 1,273,920
Nontaxable interest income 53,185 66,331 69,018
Dividends 132,333 125,969 125,643
---------- --------- ---------
$1,268,353 1,888,477 1,468,581
========== ========= =========
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, 1999
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------- ----- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
FHLMC certificates $ 6,250,981 12,782 198,438 6,065,325
FNMA certificates 10,095,884 79,103 203,897 9,971,090
GNMA certificates 16,883,677 59,492 66,028 16,877,141
Collateralized mortgage
obligations 6,488,766 - 60,036 6,428,730
----------- ------- ----- ----------
$39,719,308 151,377 528,399 39,342,286
=========== ======= ======= ==========
Held-to-maturity:
FHLMC certificates $ 4,386,178 - 80,032 4,306,146
FNMA certificates 4,319,484 - 156,331 4,163,153
GNMA certificates 4,890,604 - 23,678 4,866,926
----------- ------- ----- ----------
$13,596,266 - 260,041 13,336,225
=========== ======= ====== ==========
<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>
26
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. LOANS RECEIVABLE:
The Company primarily originates 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,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
First mortgage loans:
Principal balances:
Collateralized by one- to four-
family residences $ 133,815,912 120,767,680
Collateralized by multi-family properties 8,163,177 7,262,448
Collateralized by other properties 19,855,105 15,571,636
Construction loans 6,353,795 7,149,298
------------- -----------
168,187,989 150,751,062
Less:
Undisbursed portion of construction loans (3,783,005) (2,431,435)
Net deferred loan origination fees (39,637) (44,177)
Unearned premiums 4,260 4,944
------------- -----------
TOTAL FIRST MORTGAGE LOANS 164,369,607 148,280,394
------------- -----------
Consumer and other loans:
Principal balances:
Consumer loans 1,619,547 1,715,176
Home equity line of credit 1,135,384 -
Loans on savings accounts 748,617 836,673
Student loans 703,633 438,901
------------- -----------
TOTAL CONSUMER AND OTHER LOANS 4,207,181 2,990,750
------------- -----------
Less allowance for loan losses (975,898) (1,091,867)
------------- -----------
$ 167,600,890 150,179,277
============= ===========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 1,091,867 1,015,023 928,896
Provision for loan losses 60,000 73,500 84,000
Charge-offs and recoveries, net (12,669) 3,344 2,127
Recovery of specific reserve (163,300) - -
----------- --------- ---------
Balance, end of year $ 975,898 1,091,867 1,015,023
=========== ========= =========
</TABLE>
It is the opinion of management that adequate provisions have been made for
anticipated losses in the loan portfolio. At December 31, 1999 and 1998 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 $50,881,000, $55,888,000 and $57,842,000 at December 31, 1999,
1998 and 1997, respectively.
Mortgage servicing rights of $78,960, $215,810 and $145,638 were capitalized in
1999, 1998 and 1997, respectively. The fair value of mortgage servicing rights
approximates the current book value as of December 31, 1999, 1998 and 1997.
Amortization of mortgage-servicing rights was $111,975, $61,595 and $13,462
for1999, 1998 and 1997, respectively.
27
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. REAL ESTATE OWNED:
The company has no real estate owned as of December 31, 1999, 1998 and 1997.
Activity in the allowance for losses for the year 1997 on real estate owned
is summarized as follows:
1997
----
Balance, beginning of year $ 52,375
Allowance utilized in sale of real estate owned (52,375)
Other changes -
--------
Balance, end of year $ -
========
5. PROPERTY AND EQUIPMENT:
Property and equipment, net, consists of the following:
DECEMBER 31,
----------------------------
1999 1998
---- ----
Buildings and improvements $ 1,594,718 1,591,370
Leasehold improvements 1,009,855 1,006,041
Furniture, fixtures and equipment 1,669,579 1,640,684
----------- ---------
4,274,152 4,238,095
Accumulated depreciation and amortization (2,871,454) (2,738,743)
----------- ---------
1,402,698 1,499,352
Land 539,431 539,431
----------- ---------
$ 1,942,129 2,038,783
=========== =========
28
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. SAVINGS ACCOUNTS:
Savings accounts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------------------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF AVERAGE OF
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
-------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Passbooks 2.75% $ 20,886,203 10.9% 2.75% $ 23,220,058 11.5%
NOW accounts
and variable rate
money market
savings and
checking accounts 2.34 25,579,892 13.3 2.09 24,780,386 12.2
-------------- ----- ------------ -----
46,466,095 24.2 48,000,444 23.7
-------------- ----- ------------ -----
Certificates:
1-6 month 4.57 16,583,974 8.7 5.13 40,457,251 20.0
1 year 5.06 27,218,703 14.2 5.26 19,924,763 9.9
18 month 5.29 29,571,546 15.4 5.59 25,845,935 12.8
18 month - 5 years 5.69 48,375,033 25.2 5.80 45,569,318 22.5
5-8 years 5.72 18,710,937 9.8 5.74 17,811,867 8.8
Jumbos 4.72 4,746,329 2.5 4.48 4,651,814 2.3
-------------- ----- ------------ -----
145,206,522 75.8 154,260,948 76.3
-------------- ----- ------------ -----
TOTAL SAVINGS
ACCOUNTS $ 191,672,617 100.0% $202,261,392 100.0%
============== ===== ============ =====
</TABLE>
At December 31, 1999, scheduled maturities of certificate accounts are as
follows:
2000 $ 94,723,552
2001 26,536,630
2002 11,835,230
2003 8,494,127
2004 3,616,983
Thereafter -
---------------
$ 145,206,522
===============
Interest and dividends paid and accrued on deposits, net of penalties assessed
depositors exercising early certificate withdrawal privileges, are as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
Passbooks $ 612,638 619,736 631,146
NOW and money market accounts 512,567 473,835 493,555
Certificates 7,871,724 9,084,789 8,982,165
----------- ---------- ----------
$ 8,996,929 10,178,360 10,106,866
=========== ========== ==========
Certificates of deposit with balances of $100,000 or more totaled
approximately $21,616,000 and $19,836,000 at December 31, 1999 and 1998,
respectively.
29
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. Federal Home Loan Bank Advances:
FHLB advances at December 31, 1999 consist of the following:
INTEREST OUTSTANDING
MATURITY DATE RATE BALANCE
------------- ---- -------
01/31/00 4.85% $ 2,500,000
03/20/00 4.75 3,000,000
05/01/06 8.15 176,652
06/18/08 5.38 2,000,000
09/08/08 6.12 2,000,000
10/02/08 4.82 1,000,000
11/06/08 4.64 2,000,000
11/10/08 6.07 2,000,000
04/29/09 5.44 3,000,000
05/05/09 4.67 2,000,000
09/30/09 6.61 4,000,000
10/01/09 6.65 4,911,166
12/01/09 6.50 1,630,261
12/21/09 5.76 2,000,000
10/01/10 6.35 2,641,503
12/01/10 6.30 1,067,179
05/01/14 1.50 1,183,687
-----------
$37,110,448
===========
At December 31, 1999 the Company's FHLB advances were comprised of
$13,500,000 of adjustable rate advances and $23,610,000 of fixed rate
advances.
The advances require principal payments as follows:
2000 $ 7,622,438
2001 1,770,905
2002 1,479,240
2003 1,237,210
2004 1,036,382
Thereafter 23,964,273
-----------
$37,110,448
===========
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, 1999, the most restrictive required
level of capital to satisfy regulatory requirements was approximately
$9,995,000.
Franklin Savings 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 qualified 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, 1999, include approximately $3,167,000 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
$1,035,000 at December 31, 1999.
30
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCKHOLDERS' EQUITY, CONTINUED:
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. The OTS imposes various
restrictions on the ability of savings institutions, such as Franklin, to
make capital distributions. Capital distributions include, without
limitation, payments of cash dividends, repurchases and certain other acqui-
sitions by an institution of its shares and payments to stockholders of
another institution in an acquisition of such other institution. An
application must be submitted and approval obtained (i) if the proposed
distribution would cause total distributions for the calendar year to exceed
net income for that year to date plus the institution's retained net income
for that year to date, plus the retained net income for the preceding two
years; (ii) if the institution will not be at least adequately capitalized
following the capital distribution; (iii) if the proposed distribution will
violate a prohibition contained in any applicable statute, regulation or
agreement between the institution and the OTS (or FDIC), or violate a
condition imposed in an OTS approved application or notice. If the
subsidiary of a holding company is not required to file an application, it
must file a notice with the OTS. The amount of any dividends cannot reduce
the Company's capital below the liquidation account discussed below.
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:
1997
----
Options outstanding at beginning of year 71,358
Canceled -
Exercised (71,358)
=======
Options outstanding at end of year -
=======
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
31
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCKHOLDERS' EQUITY, CONTINUED:
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:
1999 1998 1997
---- ---- ----
Options outstanding at beginning of year 128,475 68,325 -
Granted 67,275 71,100 68,325
Canceled/Forfeited (43,533) (10,950) -
Exercised
------- ------- ------
Options outstanding at end of year 152,217 128,475 68,325
======= ======= ======
All options have an exercise price between $12.81 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 did not meet the
performance goals for 1999 thereby reducing the 1998 options by 50%.
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:
Net income: 1999 1998 1997
---- ---- ----
As reported $1,411,285 1,833,372 1,688,274
Additional comp. cost 190,076 121,532 7,049
Pro forma net income 1,221,209 1,711,840 1,681,225
Basic earnings per share: 1999 1998 1999
---- ---- ----
As reported $ 0.85 1.05 0.95
Pro forma earnings per share 0.73 0.98 0.95
The fair value and pro forma income information calculated for options
granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for
1999, 1998, and 1997 respectively: expected volatility of .35 percent, .65
percent, and .27 percent, risk free interest rates of 6.9 percent, 4.8
percent, and 5.9 percent, dividend yields of .30 percent, .30 percent, and
.27 percent, and for all years, expected lives of ten years.
9. REGULATORY CAPITAL REQUIREMENTS:
The OTS has promulgated regulations implementing uniform minimum capital
requirements and capital adequacy standards for federally insured savings
associations. At December 31, 1999, the capital 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, 1999, Franklin Savings
meets each of the capital requirements as follows:
32
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. REGULATORY CAPITAL REQUIREMENTS, CONTINUED
Franklin's computed
capital as a
Computed Franklin's percent of
regulatory computed total assets or
requirements capital risk-adjusted assets
------------ ------- --------------------
Tier 1 capital $9,995,000 17,645,000 7.06%
Risk-based capital 9,246,000 18,458,000 15.97%
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
33
<PAGE> 31
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,687,970 3,687,970 8,369,318 8,369,318
Investment securities 19,196,974 19,196,974 19,125,146 19,125,146
Mortgage-backed securities 52,938,552 52,679,000 55,877,403 55,991,000
Loans receivable 167,600,890 163,382,000 150,179,277 151,517,000
Investment in FHLB stock 1,971,200 1,971,200 1,788,700 1,788,700
Financial liabilities:
Savings accounts 191,672,617 191,446,000 202,261,392 203,480,000
FHLB advances 37,110,448 36,890,000 15,575,801 15,994,000
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
CONTRACTUAL FAIR CONTRACTUAL FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Commitments to extend credit $ 4,155,800 4,155,800 4,110,000 4,110,000
Unfunded construction loans 3,783,000 3,783,000 2,431,000 2,431,000
</TABLE>
11. FEDERAL INCOME TAXES:
The components of income tax expense are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
Federal:
Current $628,830 924,170 788,357
Deferred 56,730 (15,022) 12,125
-------- ------- -------
$685,560 909,148 800,482
======== ======= =======
Total income tax expense differed from the amounts computed by applying the
federal statutory tax rates to pretax income as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
Tax at statutory rates $712,927 932,457 846,177
Benefit of tax exempt interest (12,000) (15,343) (15,771)
Other (15,367) (7,966) (29,924)
-------- ------- -------
$685,560 909,148 800,482
======== ======= =======
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998
--------- -------
Deferred tax asset arising from:
Allowance for loan losses $ 352,000 387,000
Deferred loan fees and costs 48,500 64,000
Depreciation 53,800 47,400
Unrealized loss on securities 465,800 -
Other, net 59,800 27,700
--------- -------
TOTAL DEFERRED TAX ASSETS 979,900 526,100
--------- -------
Deferred tax liability arising from:
FHLB stock (409,900) (365,100)
Unrealized gain on securities - (49,000)
--------- -------
TOTAL DEFERRED TAX LIABILITIES (409,900) (414,100)
--------- -------
NET DEFERRED TAX ASSET $ 570,000 112,000
========= =======
Net deferred tax assets and federal income tax expense in future years can be
significantly affected by changes in enacted tax rates.
34
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. BENEFIT PLANS
The Company has a noncontributory defined contribution 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 non-contributory defined
contribution 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 $139,498, 110,190 and $130,341 for the
years ended December 31, 1999, 1998 and 1997, 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 1999,
1998 and 1997. At December 31, 1999, 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
1999, 1998, and 1997. The Company's policy is to charge to expense the
amount contributed to the ESOP. At December 31, 1999, the ESOP held
142,639 allocated shares and 8,300 shares committed to be allocated.
13. LEASE COMMITMENTS:
The Company, as lessee, leases certain facilities under operating leases
which expire over the next ten years, with renewal options.
The following is a schedule, by years, of future minimum rental payments
required under operating leases during the remaining non-cancelable
portion of the lease terms:
Year ending December 31:
2000 $ 98,738
2001 67,460
2002 64,572
2003 64,572
2004 40,272
---------
Thereafter 85,184
$ 420,798
=========
Rent expense was $152,654, $163,693 and $139,297 in 1999, 1998 and 1997,
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:
Year ending December 31:
2000 $ 101,605
2001 102,089
2002 87,090
---------
$ 290,784
=========
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, 1999. The following is an analysis of the
activity of such loans for the years indicated:
35
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. LOANS TO RELATED PARTIES, CONTINUED:
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, 1999. The following is an analysis of the
activity of such loans for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 1,943,843 1,484,053 830,787
Loans originated 1,292,335 745,640 696,776
Repayments (1,282,504) (285,850) (43,510)
----------- --------- ---------
BALANCE, END OF YEAR $ 1,953,674 1,943,843 1,484,053
=========== ========= =========
</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, 1999, the Company's total commitment to extend credit was
approximately $4,155,800, and the Company had commitments to disburse
construction loans of approximately $3,783,000. The Company also had
undisbursed lines of credit on consumer and commercial loans of
approximately $759,100.
16. FIRST FRANKLIN CORPORATION - PARENT COMPANY ONLY FINANCIAL INFORMATION:
The following condensed balance sheets as of December 31, 1999 and 1998
and condensed statements of income and cash flows for each of the three
years in the period ended December 31, 1999 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,
------------------------------
1999 1998
<S> <C> <C>
Cash $ 180,011 1,060,035
Investment in Franklin Savings 16,779,967 15,524,906
Loans to Franklin Savings 1,750,000 3,300,000
Other assets 1,212,552 1,231,070
------------ -----------
$ 19,922,530 21,116,011
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 167,034 174,901
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 1999 and 1998 13,406 13,406
Additional paid-in capital 6,189,237 6,189,237
Treasury stock, at cost - 380,494 and 306,494 shares in 1999
and 1998, respectively (3,733,041) (2,630,422)
Retained earnings 18,190,050 17,273,849
Net unrealized gain (loss) on available-for-sale securities of parent
and subsidiary (904,156) 95,040
------------ -----------
$ 19,922,530 21,116,011
============ ===========
</TABLE>
36
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FIRST FRANKLIN CORPORATION - PARENT COMPANY ONLY FINANCIAL INFORMATION,
CONTINUED:
CONDENSED STATEMENTS OF INCOME
------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Equity in earnings of Franklin Savings $ 1,354,257 1,746,771 1,654,817
Interest income 176,797 243,178 227,755
Operating expenses (349,114) (353,019) (296,012)
Other Income 234,595 222,842 107,664
Federal income tax expense (5,250) (26,400) (5,950)
----------- --------- ---------
Net Income $ 1,411,285 1,833,372 1,688,274
=========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,411,285 1,833,372 1,688,274
Equity in earnings of Franklin Savings (1,354,257) (1,746,771) (1,654,817)
Dividends received from Franklin Savings - 1,582,000 277,000
Change in other assets and liabilities 10,651 (41,908) 107,697
----------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 67,679 1,626,693 418,154
----------- --------- ---------
Cash flows from investing activities:
Net repayments (borrowings) of loans
to Franklin Savings 650,000 (3,300,000) -
Maturity of investment securities - 2,150,000 1,000,000
Capital expenditures - (94,305) (96,866)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 650,000 (1,244,305) 903,134
----------- --------- ---------
Cash flows from financing activities:
Payment of dividends (495,084) (508,587) (428,036)
Proceeds from sale of common stock - - 237,860
Purchase of treasury stock (1,102,619) (1,286,652) (202,575)
NET CASH USED IN FINANCING ACTIVITIES (1,597,703) (1,795,239) (392,751)
----------- --------- ---------
NET INCREASE (DECREASE) IN CASH (880,024) (1,412,851) 928,537
Cash at beginning of year 1,060,035 2,472,886 1,544,349
----------- --------- ---------
CASH AT END OF YEAR $ 180,011 1,060,035 2,472,886
=========== ========= =========
Supplemental disclosure of non-cash activities:
Contribution of capital to Franklin Savings-
note receivable converted to investment $ 900,000 - -
=========== ========= =========
</TABLE>
37
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. MADISON SERVICE CORPORATION:
In accordance with OTS requirements, the following summary of financial
information of Madison Service Corporation for the year ended December 31,
1999, is presented:
BALANCE SHEET
-------------
ASSETS
Cash $225,963
Other assets 15,013
--------
$240,976
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Equity 240,976
--------
$240,976
========
STATEMENT OF OPERATIONS
-----------------------
Revenues:
Interest Income $ 7,793
Service fees and other 7,496
Operating expenses (3,385)
--------
INCOME BEFORE FEDERAL INCOME TAX 11,904
Federal income tax 4,050
--------
NET INCOME $ 7,854
========
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:
Common stock, 220 shares issued and outstanding $110,000
Retained earnings 130,976
--------
$240,976
========
38
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. EARNINGS PER SHARE:
Earnings per share for the years ended December 31, 1999, 1998 and 1997
are calculated as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- --------- --------
<S> <C> <C> <C>
Basic EPS
---------
Income available to common stockholders $1,411,285 1,662,090 $ 0.85
========
Effect of dilutive securities:
Stock options
1997 Plan - -
---------- ---------
Diluted EPS
-----------
Income available to common stockholders
+ assumed conversions $1,411,285 1,662,090 $ 0.85
========== ========= ========
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- --------- --------
<S> <C> <C> <C>
Basic EPS
---------
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
========== ========= ========
<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 EPS
-----------
Income available to common stockholders
+ assumed conversions $1,688,274 1,837,084 $ 0.92
========== ========= ========
</TABLE>
The effect of the stock options was anti-dilutive for the years ended December
31, 1999 and 1998, and therefore the stock options were not included in the
dilutive EPS for those periods.
39
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
All adjustments necessary for a fair statement of operations for each
period have been included.
<TABLE>
<CAPTION>
1999
----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $3,900 3,979 3,981 4,271
Interest expense 2,523 2,472 2,531 2,737
------ ---- ---- ----
NET INTEREST INCOME 1,377 1,507 1,450 1,534
Provision (credit) for loan losses 20 (143) - 20
------ ---- ---- ----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,357 1,650 1,450 1,514
Noninterest income 177 180 141 148
Noninterest expense 1,165 1,127 1,133 1,095
------ ---- ---- ----
INCOME BEFORE FEDERAL
INCOME TAXES 369 703 458 567
Federal income taxes 118 235 149 184
------ ---- ---- ----
NET INCOME $ 251 468 309 383
====== ==== ==== ====
Earnings per common share
BASIC $ 0.15 0.27 0.19 0.24
====== ==== ==== ====
DILUTED $ 0.15 0.27 0.19 0.24
====== ==== ==== ====
<CAPTION>
1998
----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------------------------------------
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>
40
<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
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,482,970
<INT-BEARING-DEPOSITS> 205,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,539,260
<INVESTMENTS-CARRYING> 13,596,266
<INVESTMENTS-MARKET> 13,336,225
<LOANS> 168,576,788
<ALLOWANCE> 975,898
<TOTAL-ASSETS> 250,205,223
<DEPOSITS> 191,672,617
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,666,662
<LONG-TERM> 37,110,448
0
0
<COMMON> 13,406
<OTHER-SE> 19,742,090
<TOTAL-LIABILITIES-AND-EQUITY> 250,205,223
<INTEREST-LOAN> 11,856,552
<INTEREST-INVEST> 4,175,372
<INTEREST-OTHER> 99,068
<INTEREST-TOTAL> 16,130,992
<INTEREST-DEPOSIT> 8,996,929
<INTEREST-EXPENSE> 10,262,991
<INTEREST-INCOME-NET> 5,868,001
<LOAN-LOSSES> (103,300)
<SECURITIES-GAINS> 23,399
<EXPENSE-OTHER> 4,519,561
<INCOME-PRETAX> 2,096,845
<INCOME-PRE-EXTRAORDINARY> 1,411,285
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,411,285
<EPS-BASIC> 0.85
<EPS-DILUTED> 0.85
<YIELD-ACTUAL> 2.51
<LOANS-NON> 481,000
<LOANS-PAST> 458,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,001,000
<ALLOWANCE-OPEN> 1,091,867
<CHARGE-OFFS> 12,669
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 975,898
<ALLOWANCE-DOMESTIC> 252,547
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 723,351
</TABLE>
