<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
June 30, 1996 33-27232-A
FRANKLIN FINANCIAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Tennessee 62-1376024
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Public Square, Franklin, Tennessee 37064
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (615)790-2265
-------------------------------
Not applicable
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(Former name, former address and formal fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
---------- ----------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, $2.50 Par Value 1,729,589
----------------------------- -----------------------------
Class Outstanding at August 9, 1996
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(In Thousands)
June 30, December 31,
1996 1995
ASSETS
<S> <C> <C>
Cash and due from banks $ 8,063 7,971
Federal funds sold - 532
Interest-bearing deposits in financial institutions - 93
Investment securities available-for-sale, at fair value 16,871 18,394
Mortgage-backed securities available-for-sale, at fair value 16,435 14,448
Investment securities held-to-maturity, market value $3,067,000
at June 30, 1996 and $3,210,000 December 31, 1995 3,127 3,195
Mortgage-backed securities held-to-maturity, market value
$715,000 at June 30, 1996 and $251,000 December 31, 1995 719 249
Loans held for resale, at cost, which approximates market 759 1,423
Loans - portfolio 136,338 110,408
Allowance for loan losses (1,282) (1,062)
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Loans, net 135,056 109,346
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Premises and equipment 4,837 4,804
Accrued income receivable 1,423 1,311
Other assets 955 595
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$ 188,245 162,361
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 22,897 21,417
Interest-bearing 151,769 128,951
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Total deposits 174,666 150,368
Advances from Federal Home Loan Bank
and other borrowings 1,227 -
Other liabilities 833 995
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Total liabilities 176,726 151,363
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Stockholders' equity:
Common stock, $2.50 par value. Authorized
5,000,000 shares; issued 1,723,889 and 1,723,235
at June 30, 1996 and December 31, 1995,
respectively 4,310 4,308
Additional paid-in capital 5,164 5,162
Unrealized gain (loss) on securities available-for-sale (308) 226
Retained earnings 2,353 1,302
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Total stockholders' equity 11,519 10,998
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$ 188,245 162,361
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</TABLE>
2
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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands except for per share information)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 3,413 2,317 6,425 4,330
Investment securities, taxable 525 452 1,041 866
Investment securities, tax-exempt 70 62 138 126
Federal funds sold 10 44 41 59
Deposits in financial institutions - 2 1 3
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Total interest income 4,018 2,877 7,646 5,384
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Interest expense:
Deposits 1,804 1,499 3,531 2,750
Other borrowings 17 1 24 19
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Total interest expense 1,821 1,500 3,555 2,769
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Net interest income 2,197 1,377 4,091 2,615
Provision for loan losses 125 65 220 160
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Net interest income after
provision for loan losses 2,072 1,312 3,871 2,455
Other income:
Service charges on deposit accounts 232 154 425 300
Mortgage banking activities 57 117 163 200
Other service charges, commissions and fees 78 32 105 60
Gains on securities transactions 13 34 43 32
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Total other income 380 337 736 592
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Other expenses:
Salaries and employee benefits 837 697 1,646 1,328
Occupancy expense 337 291 670 531
Other operating expenses 366 340 665 663
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Total other expenses 1,540 1,328 2,981 2,522
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Income before income taxes 912 321 1,626 525
Income taxes 325 106 575 159
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NET INCOME $ 587 215 1,051 366
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NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE: $ 0.31 0.12 0.55 0.20
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NET INCOME PER COMMON SHARE -
ASSUMING FULL DILUTION: $ 0.31 0.12 0.55 0.20
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</TABLE>
3
<PAGE> 4
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended
June 30,
1996 1995
---- ----
<S> <C> <C>
Increase (decrease) in cash and due from banks
Cash flows from operating activities:
Net income $ 1,051 366
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 295 187
Provision for loan losses 220 160
(Gain) loss on sale of securities (43) (32)
(Gain) on sale of loans sold (41) -
Increase in accrued income receivable (112) (138)
Deferred income taxes - -
(Increase) in other assets (53) (340)
(Decrease) increase in other liabilities (162) 315
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Net cash provided by operating activities 1,155 518
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Cash flows from investing activities:
Decrease (increase) in federal funds sold 532 (765)
Proceeds from maturities of securities available-for-sale 6,503 2,043
Proceeds from sale of securities available-for-sale 2,209 3,566
Proceeds from maturities of securities held-to-maturity 987 326
Purchases of securities available-for-sale (10,030) (8,511)
Purchases of securities held-to-maturity (1,296) (568)
Loans originated for resale (7,477) (6,795)
Proceeds from sale of loans 8,182 6,935
Net increase in portfolio loans (25,930) (17,263)
Purchases of premises and equipment (272) (1,009)
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Net cash used by investing activities (26,592) (22,041)
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Cash flows from financing activities
Net proceeds from sale of common stock 4 -
Increase in deposits 24,298 28,206
Increase (decrease) in other borrowings 1,227 (4,900)
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Net cash provided by financing activities 25,529 23,306
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Net increase in cash 92 1,783
Cash and due from banks at beginning of period 7,971 3,654
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Cash and due from banks at end of period $ 8,063 5,437
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Cash payments for interest $ 3,559 2,576
Cash payments for income taxes $ 671 77
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</TABLE>
4
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FRANKLIN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
5
<PAGE> 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Franklin National Bank (the "Bank") represents virtually all the assets of
Franklin Financial Corporation (the "Company"). The Bank, located in Franklin,
Tennessee, was opened in December of 1989 and continues to experience
substantial growth. The Bank's first full service branch was opened in the
second quarter of 1994 and a stock offering, which netted $3.3 million, was
completed that same quarter. The Bank opened its second full service branch in
January, 1995 and its third full service branch in April, 1995.
FINANCIAL CONDITION
Total assets have grown $25.9 million since December 31, 1995, for a total of
$188.2 million at June 30, 1996. The growth has been mostly funded by a $24.3
million increase in deposits.
The Bank continues to experience excellent loan demand as demonstrated by the
23.5% or $25.7 million growth in net loans since December 31, 1995, to $135.1
million at June 30, 1996. Securities available-for-sale increased $464,000 or
1.4% while securities held-to-maturity increased $309,000 or 8.7% during the
six months ended June 30, 1996.
Premises and equipment increased slightly by $33,000 since December 31, 1995.
Accrued income receivable increased $112,000 or 8.5% since December 31, 1995.
This increase is due to the combined increase of $26.5 million in loans and
securities since December 31, 1995.
The allowance for loan losses increased $220,000 since December 31, 1995, for a
total of $1,282,000 or approximately .94% of total loans. This increase is
primarily additional provision for loan losses to allow for growth in the loan
portfolio. Recoveries and charge-offs offset eachother during the first six
months of 1996. Asset quality remains good and management believes that the
allowance for loan losses is adequate at June 30, 1996. Management reviews in
detail the level of the allowance for loan losses on a quarterly basis. In
addition, Professional Bankers Services, Inc., an external bank consulting
firm, performs an annual review of the loan portfolio to provide management an
independent third party opinion regarding the adequacy of the allowance for
loan losses. The allowance is below the Bank's peer group average as a
percentage of loans. However, this level is supported based on two significant
facts: the Bank has no loans accounted for on a nonaccrual basis at June 30,
1996 and past due loans, at .16% of total loans, are substantially below the
peer group average.
LIQUIDITY AND CAPITAL RESOURCES
Management continuously monitors the Bank's liquidity, but strives to maintain
an asset/liability mix that provides the highest possible net interest margin
without taking undue risk with regard to asset quality or liquidity.
6
<PAGE> 7
Liquidity is at an adequate level with cash and due from banks of $8.1 million
at June 30, 1996. Loans and securities scheduled to mature within one year
exceed $75 million at June 30, 1996, which should provide further liquidity. In
addition, approximately $33 million of securities are classified as
available-for-sale to help meet liquidity needs should they arise. The Company
has lines of credit of $5.0 million with lending institutions and the Bank is
approved to borrow up to $4.0 million in funds from the Federal Home Loan Bank
and $7.0 million in federal funds lines to assist with capital and liquidity
needs. The Company has $750,000 in borrowings against its line of credit
and the Bank has $477,000 in federal funds purchased outstanding at June 30,
1996. The Bank has approximately $26.9 million in brokered deposits at June 30,
1996 to help fund strong loan demand. The majority of these deposits are less
than $100,000, but they are generally considered to be more volatile than the
Bank's core deposit base.
Approximately $15.6 million in loan commitments are expected to be funded
within the next six months. Furthermore, the Bank has approximately $20.3
million of other loan commitments, primarily unused lines and letters of
credit, which may or may not be funded. Other than as set forth above, there
are no known trends, commitments, or uncertainties that will result in the
Company's liquidity increasing or decreasing in a material way.
The Company had a net increase in cash and due from banks of $92,000 during
the six months ended June 30, 1996 as compared to a $1.8 million increase for
the same period in 1995. Cash provided by operating activities increased
$678,000 during the first six months of 1996, as compared to the same period in
1995.
Net cash used by investing activities increased $4.6 million during the first
six months of 1996 compared to the same period in 1995. The net increase in
portfolio loans used $8.7 million additional funds for the six months ended
June 30, 1996 as compared to the same period in 1995. Due to less substantial
increases in the securities portfolio, investing activities required $1.5
million less during the six months June 30, 1996 as compared to the previous
year. Although substantial cash flow has been required related to loans
originated for resale, proceeds from the sale of such loans has served to fund
substantially all of the cash flow requirements.
Cash provided by financing activities increased $2.2 million during the first
six months of 1996 as compared to the same period in 1995. The increase is
attributable to $1.2 million increase in other borrowings during the first six
months of 1996 as compared to a $4.9 million decrease during the same period in
1995. The increase in other borrowings is offset by a $3.9 million smaller
increase in deposits during the first six months of 1996 as compared to the
same period in 1995.
Equity capital exceeds regulatory requirements at June 30, 1996, at 6.3% of
total assets. The Company and Bank's minimum capital requirements and
compliance with the same are shown in the following table.
<TABLE>
<CAPTION>
LEVERAGE CAPITAL TIER 1 CAPITAL TOTAL RISK-BASED CAPITAL
---------------- -------------- ------------------------
REGULATORY REGULATORY REGULATORY
MINIMUM ACTUAL MINIMUM ACTUAL MINIMUM ACTUAL
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Company 3.0% 6.3% 4.0% 8.7% 8.0% 9.6%
Bank 3.0% 6.7% 4.0% 9.2% 8.0% 10.2%
</TABLE>
The Company contributed $1 million of additional capital to the Bank during the
six months ended June 30, 1996.
The capital was funded from a $750,000 draw against the Company's line of
credit and cash on hand.
7
<PAGE> 8
RESULTS OF OPERATIONS
The Company had net income of $587,000 in the second quarter and $1.1 million
for the first six months of 1996 compared to net income of $215,000 and
$366,000 for the same periods in 1995, respectively. Net income for the second
quarter and six months ended June 30, 1996 increased $372,000 and $685,000,
respectively, as compared to the same periods in 1995. Increases in net
interest income offset partially by expenses related to the overall growth of
the Bank are the primary reasons for the increase in earnings for the three and
six months ended June 30, 1996 as compared to the same periods in 1995.
Total interest income increased $1.1 million or 39.7% in the three month period
ended June 30, 1996 and $2.3 million or 42.0% for the first six months of 1996
compared to the same periods in 1995. The increase in total interest income is
primarily attributable to the similar increase in average earning assets for
the first half of 1996, compared to the first half of 1995, offset slightly by
a decrease in interest rates during the first six months of 1996 as compared
with the same period in 1995. Total interest expense increased $321,000 or
21.4% in the second quarter, and $786,000 or 28.4% in the first half of 1996 as
compared to the same periods in 1995. Total deposits have increased 16.2% from
December 31, 1995 and 37.4% from June 30, 1995. The increase in deposits is the
primary reason for the increase in interest expense. Net interest income
increased $820,000 or 59.5% during the second quarter, and $1.5 million or
56.4% in the first half of 1996 as compared to the prior year. Total earning
assets increased 37.4% since June 30, 1995 and was the primary factor in the
increase in net interest margin.
The provision for loan losses was $125,000 for the three months ended June 30,
1996 compared to $65,000 one year earlier. The year-to-date provision is
$220,000 for the six months ended June 30, 1996 as compared to $160,000 for the
same period in 1995. While the Bank's asset quality remains good, provisions
for loan losses continue to be needed to allow for growth in the Bank's loan
portfolio.
Total other income of $380,000 in the second quarter of 1996 is $43,000 more
than one year earlier. The increase is primarily attributed to an increase in
service charges on deposit accounts as the Bank's deposit base continues to
grow. Total other income of $736,000 for the six months ended June 30, 1996
increased $144,000 from the same period in 1995. Factors contributing to this
increase is a gain on sale of loans of $41,000 and $11,000 increase in gains
on securities transactions offset partially by a $37,000 decrease in mortgage
banking fees. Service charges on deposit accounts has increased $125,000 or
41.7% for the first six months of 1996 as compared to the same period in 1995.
The growth in service charges is due to the increase in deposit accounts and
efforts by the Company to collect all service charges assessed.
Total other expenses increased $212,000 or 16.0% during the second quarter and
$459,000 or 18.2% for the first half of 1996 as compared to the same periods in
1995. The increases are attributable to additional personnel and other
incremental costs related to the overall growth of the Bank. Other operating
expenses remained steady primarily due to the decrease in FDIC insurance
premiums.
8
<PAGE> 9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 23, 1996, the Company held its 1996 Annual Meeting of
Shareholders. At the meeting, the following persons were elected to serve on
the Company's Board of Directors for a term of one year and until their
successors are elected and have qualified: Richard E. Herrington , Gordon E.
Inman, Charles R. Lanier, D. Wilson Overton, Edward M. Richey and Edward P.
Silva. The number of votes cast for and against the election of each nominee
for director was as follows:
<TABLE>
<CAPTION>
Director For Against
-------- --- -------
<S> <C> <C>
Richard E. Herrington 1,424,503 0
Gordon E. Inman 1,424,503 0
Charles R. Lanier 1,424,503 0
D. Wilson Overton 1,424,503 0
Edward M. Richey 1,424,503 0
Edward P. Silva 1,424,503 0
</TABLE>
An amendment was approved to the 1990 Incentive Stock Option Plan, to,
among other things, increase the number of shares available under the Plan from
200,000 shares to 750,000 shares and to provide for the grant of non-qualified
stock option thereunder. The number of votes cast for the amendment was
1,422,733 with none against.
No other matters were presented or voted upon at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed with this report:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
27 - Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K. No report on Form 8-K was filed during the
quarter ended June 30, 1996.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN FINANCIAL CORPORATION
Dated: August 12, 1996 By: /s/ Richard E. Herrington
-----------------------------
Richard E. Herrington, President and Chief
Executive Officer (principal executive,
financial and accounting officer)
10
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 8,063
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,306
<INVESTMENTS-CARRYING> 3,846
<INVESTMENTS-MARKET> 3,782
<LOANS> 137,097
<ALLOWANCE> 1,282
<TOTAL-ASSETS> 188,245
<DEPOSITS> 174,666
<SHORT-TERM> 1,227
<LIABILITIES-OTHER> 833
<LONG-TERM> 0
0
0
<COMMON> 4,310
<OTHER-SE> 7,209
<TOTAL-LIABILITIES-AND-EQUITY> 188,245
<INTEREST-LOAN> 6,425
<INTEREST-INVEST> 1,179
<INTEREST-OTHER> 42
<INTEREST-TOTAL> 7,646
<INTEREST-DEPOSIT> 3,531
<INTEREST-EXPENSE> 3,555
<INTEREST-INCOME-NET> 4,091
<LOAN-LOSSES> 220
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 2,981
<INCOME-PRETAX> 1,626
<INCOME-PRE-EXTRAORDINARY> 1,626
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,051
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
<YIELD-ACTUAL> 4.72
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 162
<ALLOWANCE-OPEN> 1,062
<CHARGE-OFFS> 8
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,282
<ALLOWANCE-DOMESTIC> 25
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,257
</TABLE>
