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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A1
(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
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(Name of small business issuer in its charter)
Delaware 31-1221029
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4750 Ashwood Drive, Cincinnati, Ohio 45241
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 469-5352
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Securities registered pursuant to Section 12(b) of the Exchange Act:
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None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $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
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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 Corporatio-n 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
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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."
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 sells some of its fixed-rate mortgage loans to the Federal
Home Loan Mortgage Corporation ("FHLMC"). Adjustable-rate mortgage loans and
non-conforming fixed-rate mortgage loans originated are generally retained in
the portfolio. Loans are classified as available-for-sale or held to maturity at
the time of origination based on various factors, which include, but are not
limited to, FHLMC underwriting guidelines, type of property, loan type
(adjustable vs. fixed) and interest rate. During periods 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 the
latter part of 1999, interest rates offered on fixed-rate mortgages increased
substantially from levels experienced during the past few years, so demand for
fixed-rate mortgages declined. 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
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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.
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.
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The following table presents a reconciliation of Franklin's loans
receivable and mortgage-backed securities after net items:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
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
20010 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.
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The following table shows the loan origination, purchase and sale
activity, including mortgage-backed securities, of Franklin during the periods
indicated:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
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
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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 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.
Franklin originates both fixed and adjustable-rate one- to four-family
mortgage loans with terms to maturity of up to thirty years. Some of the
fixed-rate loans originated are sold to the Federal Home Loan Mortgage
Corporation ("FHLMC"). Adjustable-rate and non-conforming fixed-rate mortgages
originated are generally retained in the portfolio. Loans are classified as
available-for-sale or held to maturity at the time of origination based on
various factors, which include, but are not limited to, FHLMC underwriting
guidelines, type of property, loan type (adjustable vs. fixed) and interest
rate. 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
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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).
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
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$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
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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 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.
-10-
<PAGE> 11
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.
<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
-11-
<PAGE> 12
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 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.
-12-
<PAGE> 13
<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
-13-
<PAGE> 14
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.
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.
-14-
<PAGE> 15
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>
-15-
<PAGE> 16
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
to total to total to total
Amount loans Amount loans Amount loans
------ ------------- ------ ------------- ------ --------------
(Dollars in thousands)
Loans:
<S> <C> <C> <C> <C> <C> <C>
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
to total To total
Amount loans Amount loans
------- ------------- ------ -------------
(Dollars in thousands)
Loans:
<S> <C> <C> <C> <C>
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.
-16-
<PAGE> 17
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
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
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>
-17-
<PAGE> 18
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.
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.
-18-
<PAGE> 19
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.
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
-19-
<PAGE> 20
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:
Year ended December 31,
----------------------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
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
========= ========= =========
The following table sets forth, as of December 31, 1999, the amounts of
certificates of deposit maturing during the years indicated:
Amounts maturing in the year
ending December 31,
-----------------------------------------------------
2003 and
2000 2001 2002 thereafter
------- ------- ------- -------
(In thousands)
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
======= ======= ======= =======
-20-
<PAGE> 21
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>
-21-
<PAGE> 22
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.
The following table shows the FHLB advances outstanding as of December
31, 1999, by interest rate and maturity date:
Maturity date Interest rate Outstanding balance
------------- ------------- -------------------
(In thousands)
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
=======
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:
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<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 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.
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<PAGE> 24
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
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with securities and insurance firms and made other significant changes in the
financial services in which various types of financial institutions may engage.
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.
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<PAGE> 26
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosure, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger transaction. Community
reinvestment regulations evaluate how well and to what extent an institution
lends and invests in its designated service area, with particular emphasis on
low-to-moderate income communities and borrowers in such areas. Franklin has
received a "satisfactory" examination rating under those regulations.
OTS REGULATORY CAPITAL REQUIREMENTS. Franklin is required by OTS
regulations to meet certain minimum capital requirements. The following table
sets forth the amount and percentage level of regulatory capital of Franklin at
December 31, 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.
At December 31, 1999
------------------------------
Amount Percent
------ -------
(In thousands)
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%
======= =====
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
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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 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.
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<PAGE> 28
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
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<PAGE> 29
savings association. The Company is an affiliate of Franklin. Generally,
Sections 23A and 23B of the FRA (i) limit the extent to which a savings
association or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, (ii) limit the aggregate of all such transactions with all affiliates
to an amount equal to 20% of such capital stock and surplus, and (iii) require
that all such transactions be on terms substantially the same, or at least as
favorable to the association, as those provided in transactions with a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions. In addition to the limits in Sections 23A and 23B, a savings
association may not make any loan or other extension of credit to an affiliate
unless the affiliate is engaged only in activities permissible for a bank
holding company and may not purchase or invest in securities of any affiliate
except shares of a subsidiary. Franklin was in compliance with these
requirements and restrictions at December 31, 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
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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 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.
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<PAGE> 31
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
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<PAGE> 32
the United States Government or an agency thereof; deposits in any FHLB; or
other real estate related collateral (up to 30% of the member association's
capital) acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance. The FHLB has established an "Affordable
Housing Program" to subsidize the interest rate on advances to member
associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. Franklin has participated in this program.
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.
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A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Franklin, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that began after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
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
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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.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment No. 1 to 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)
Date: July 28, 2000
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