<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:
March 31, 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 prinicpal 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 1,723,675
----------------------------- ------------------------------
Class Outstanding at May 10, 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)
March 31, December 31,
1996 1995
ASSETS
<S> <C> <C>
Cash and due from banks $ 5,774 7,971
Federal funds sold 1,545 532
Interest-bearing deposits in financial institutions - 93
Investment securities available-for-sale, at fair value 17,952 18,394
Mortgage-backed securities available-for-sale, at fair value 16,137 14,448
Investment securities held-to-maturity, market value $2,292,000
at March 31, 1996 and $3,210,000 December 31, 1995 2,923 3,195
Mortgage-backed securities held-to-maturity, market value
$242,000 at March 31, 1996 and $251,000 December 31, 1995 238 249
Loans held for resale, at cost, which approximates market 1,303 1,423
Loans - portfolio 123,234 110,408
Allowance for loan losses (1,161) (1,062)
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Loans, net 122,073 109,346
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Premises and equipment 4,789 4,804
Accrued income receivable 1,399 1,311
Other assets 711 595
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$174,844 162,361
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 23,283 21,417
Interest-bearing 139,330 128,951
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Total deposits 162,613 150,368
Advances from Federal Home Loan Bank - -
Other liabilities 988 995
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Total liabilities 163,601 151,363
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Stockholders' equity:
Common stock, $2.50 par value. Authorized
5,000,000 shares; issued 1,723,544 and 1,723,235
at March 31, 1996 and December 31, 1995,
respectively 4,309 4,308
Additional paid-in capital 5,163 5,162
Unrealized gain (loss) on securities available-for-sale 5 226
Retained earnings 1,766 1,302
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Total stockholders' equity 11,243 10,998
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$174,844 162,361
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</TABLE>
1
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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
March 31,
1996 1995
<S> <C> <C>
Interest income:
Loans, including fees $3,012 2,013
Investment securities, taxable 516 414
Investment securities, tax-exempt 68 64
Federal funds sold 31 15
Deposits in financial institutions 1 1
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Total interest income 3,628 2,507
Interest expense:
Deposits 1,727 1,251
Other borrowings 7 18
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Total interest expense 1,734 1,269
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Net interest income 1,894 1,238
Provision for loan losses 95 95
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Net interest income after
provision for loan losses 1,799 1,143
Other income:
Service charges on deposit accounts 193 146
Mortgage banking activities 106 82
Other service charges, commissions and fees 27 28
Gains on securities transactions 30 (2)
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Total other income 356 254
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Other expenses:
Salaries and employee benefits 809 631
Occupancy expense 333 240
Other operating expenses 299 322
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Total other expenses 1,441 1,193
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Income before income taxes 714 204
Income taxes 250 53
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NET INCOME $ 464 151
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NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: $ 0.25 0.08
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NET INCOME PER COMMON SHARE - ASSUMING FULL DILUTION: $ 0.25 0.08
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</TABLE>
2
<PAGE> 4
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Increase (decrease) in cash and due from banks
Cash flows from operating activities:
Net income $ 464 151
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 125 80
Provision for loan losses 95 95
(Gain) loss on sale of securities (30) 2
Increase in accrued income receivable (88) (91)
Deferred income taxes - -
Decrease (increase) in other assets 19 (293)
(Decrease) increase in other liabilities (7) 237
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Net cash provided by operating activities 578 181
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Cash flows from investing activities:
Increase in federal funds sold (1,013) (4,639)
Proceeds from maturities of securities available-for-sale 3,518 961
Proceeds from sale of securities available-for-sale 1,607 1,644
Proceeds from maturities of securities held-to-maturity 434 171
Purchases of securities available-for-sale (6,714) (4,594)
Purchases of securities held-to-maturity (58) (93)
Mortgage loans originated for resale (4,875) (1,463)
Proceeds from sale of mortgage loans 4,995 2,730
Net increase in portfolio loans (12,822) (9,181)
Purchases of premises and equipment (94) (601)
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Net cash used by investing activities (15,022) (15,065)
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Cash flows from financing activities
Net proceeds from sale of common stock 2 -
Increase in deposits 12,245 19,058
(Decrease) in other borrowings - (4,900)
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Net cash provided by financing activities 12,247 14,158
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Net decrease in cash (2,197) (726)
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 $ 5,774 2,928
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Cash payments for interest $ 1,737 1,067
Cash payments for income taxes $ 99 14
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</TABLE>
3
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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 the 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 three month period ended March 31, 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.
4
<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 $12.5 million since December 31, 1995, for a total of
$174.8 million at March 31, 1996. The growth has been mostly funded by a $12.2
million increase in deposits.
The Bank continues to experience excellent loan demand as demonstrated by the
11.6% or $12.7 million growth in net loans since December 31, 1995, to $122.1
million at March 31, 1996. Securities available-for-sale increased $1.2 million
or 3.8% while securities held-to-maturity decreased $.3 million or 8.2% during
the three months ended March 31, 1996.
Premises and equipment decreased slightly by $15,000 since December 31, 1995.
Accrued income receivable increased $88,000 or 6.7% since December 31, 1995.
This increase is due to the combined increase of $13.6 million in loans and
securities since December 31, 1995.
The allowance for loan losses increased $99,000 since December 31, 1995, for a
total of $1,161,000 or approximately .94% of total loans. This increase is
primarily additional provision for loan losses to allow for growth in the loan
portfolio. Recoveries exceeded charge-offs during the first quarter of 1996 by
$4,000. Asset quality remains good and management believes that the allowance
for loan losses is adequate at March 31, 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 March 31, 1996 and past due
loans, at .45% 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.
5
<PAGE> 7
Liquidity is at an adequate level with cash and due from banks of $5.8 million
at March 31, 1996. Loans and securities scheduled to mature within one year
exceed $73 million at March 31, 1996, which should provide further liquidity.
In addition, approximately $34 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 Bank has approximately $23.3 million in brokered deposits at March
31, 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 $12.7 million in loan commitments are expected to be funded
within the next six months. Furthermore, the Bank has approximately $20.0
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 decrease in cash and due from banks of $2.2 million
during the three months ended March 31, 1996 as compared to a $.7 million
decrease for the same period in 1995. Cash provided by operating activities
increased $397,000 during the first three months of 1996, as compared to the
same period in 1995.
Net cash used by investing activities decreased $43,000 during the first three
months of 1996 compared to the same period in 1995. Due to less substantial
increases in the securities portfolio, investing activities required $698,000
less during the three months March 31, 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. The net increase in portfolio
loans used $3.6 million additional funds for the three months ended March 31,
1996 as compared to the same period in 1995.
Cash provided by financing activities decreased $1.9 million during the first
three months of 1996 as compared to the same period in 1995. The decrease is
attributable to $6.8 million smaller increase in deposits offset by $4.9
million in other borrowings during the first nine months of 1996 as compared to
the same period in 1995.
Equity capital exceeds regulatory requirements at March 31, 1996, at 6.4% 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 REGLATORY
MINIMUM ACTUAL MINIMUM ACTUAL MINIMUM ACTUAL
<S> <C> <C> <C> <C> <C> <C>
Company 3.0% 6.4% 4.0% 9.1% 8.0% 10.0%
Bank 3.0% 6.3% 4.0% 8.9% 8.0% 9.9%
</TABLE>
6
<PAGE> 8
RESULTS OF OPERATIONS
The Company had net income of $464,000 in the first quarter of 1996 compared to
net income of $151,000 for the same period in 1995. Net income for the first
quarter of 1996 increased $313,000 as compared to the same period 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 months ended March 31, 1996 as compared to the same period in
1995.
Total interest income increased $1.1 million or 44.7% in the three month period
ended March 31, 1996 compared to the same period in 1995. The increase in
total interest income is primarily attributable to the similar increase in
average earning assets for the first three months of 1996, compared to the
first three months of 1995, offset slightly by a decrease in interest rates
during the first three months of 1996 as compared with the same period in 1995.
Total interest expense increased $465,000 or 36.6% in the first quarter of
1996, as compared to the same period in 1995. Total deposits have increased
8.1% from December 31, 1995 and 37.8% from March 31, 1995. The increase in
deposits accounts is the primary reason for the increase in interest expense.
Net interest income increased $656,000 or 53.0% during the first quarter as
compared to the prior year. Total earning assets increased 36.2% since March
31, 1995 and was the primary factor in the increase in net interest margin.
The provision for loan losses was $95,000 for the three months ended March 31,
1996 and 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 $356,000 in the first quarter of 1996 is $102,000 more
than one year earlier. Factors contributing to this increase is an increase in
mortgage banking activities of $24,000 and $32,000 increase in gains on
securities transactions. Service charges on deposit accounts has increased
$47,000 or 32.2% for the first three 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 $248,000 or 20.8% during the first quarter 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 decreased primarily due to the decrease in
FDIC insurance premiums.
7
<PAGE> 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are filed with this report:
Exhibit
Number Description of Exhibit
------- ----------------------
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. No report on Form 8-K was filed during the
quarter ended March 31, 1996.
8
<PAGE> 10
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: May 13, 1996 By: /s/ Richard E. Herrington
------------ ------------------------------------------
Richard E. Herrington, President and Chief
Executive Officer (principal executive,
financial and accounting officer)
9
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 5,774
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,545
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,089
<INVESTMENTS-CARRYING> 3,161
<INVESTMENTS-MARKET> 2,534
<LOANS> 124,537
<ALLOWANCE> 1,161
<TOTAL-ASSETS> 174,844
<DEPOSITS> 162,613
<SHORT-TERM> 0
<LIABILITIES-OTHER> 988
<LONG-TERM> 0
0
0
<COMMON> 4,309
<OTHER-SE> 6,934
<TOTAL-LIABILITIES-AND-EQUITY> 174,844
<INTEREST-LOAN> 3,012
<INTEREST-INVEST> 584
<INTEREST-OTHER> 32
<INTEREST-TOTAL> 3,628
<INTEREST-DEPOSIT> 1,727
<INTEREST-EXPENSE> 1,734
<INTEREST-INCOME-NET> 1,894
<LOAN-LOSSES> 95
<SECURITIES-GAINS> 30
<EXPENSE-OTHER> 1,441
<INCOME-PRETAX> 714
<INCOME-PRE-EXTRAORDINARY> 714
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 464
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<YIELD-ACTUAL> 4.91
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 167
<ALLOWANCE-OPEN> 1,062
<CHARGE-OFFS> 2
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,161
<ALLOWANCE-DOMESTIC> 29
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,132
</TABLE>
