<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:
September 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
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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 1,729,972
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Class Outstanding at November 8, 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)
September 30, December 31,
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 6,093 7,971
Federal funds sold - 532
Interest-bearing deposits in financial institutions - 93
Investment securities available-for-sale, at fair value 17,052 18,394
Mortgage-backed securities available-for-sale, at fair value 18,590 14,448
Investment securities held-to-maturity, market value $3,289,000
at September 30, 1996 and $3,210,000 December 31, 1995 3,309 3,195
Mortgage-backed securities held-to-maturity, market value
$1,455,000 at September 30, 1996 and $251,000
at December 31, 1995 1,464 249
Loans held for resale, at cost, which approximates market 1,963 1,423
Loans - portfolio 143,251 110,408
Allowance for loan losses (1,351) (1,062)
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Loans, net 141,900 109,346
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Premises and equipment 4,781 4,804
Accrued income receivable 1,488 1,311
Other assets 858 595
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$197,498 162,361
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 21,595 21,417
Interest-bearing 161,091 128,951
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Total deposits 182,686 150,368
Advances from Federal Home Loan Bank
and other borrowings 1,530 -
Other liabilities 912 995
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Total liabilities 185,128 151,363
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Stockholders' equity:
Common stock, $2.50 par value. Authorized
5,000,000 shares; issued 1,729,672 and 1,723,235
at September 30, 1996 and December 31, 1995,
respectively 4,324 4,308
Additional paid-in capital 5,217 5,162
Unrealized gain (loss) on securities available-for-sale (231) 226
Retained earnings 3,060 1,302
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Total stockholders' equity 12,370 10,998
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$197,498 162,361
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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 Nine Months Ended
September 30, September 30,
Interest income: 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loans, including fees $3,715 2,583 10,140 6,913
Investment securities, taxable 577 477 1,618 1,343
Investment securities, tax-exempt 67 62 205 188
Federal funds sold 17 16 58 75
Deposits in financial institutions - 2 1 5
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Total interest income 4,376 3,140 12,022 8,524
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Interest expense:
Deposits 1,999 1,566 5,530 4,316
Other borrowings 22 8 46 27
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Total interest expense 2,021 1,574 5,576 4,343
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Net interest income 2,355 1,566 6,446 4,181
Provision for loan losses 70 70 290 230
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Net interest income after
provision for loan losses 2,285 1,496 6,156 3,951
Other income:
Service charges on deposit accounts 226 179 651 479
Mortgage banking activities 174 147 337 344
Other service charges, commissions and fees 25 35 130 95
Gains on securities transactions 13 4 56 36
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Total other income 438 365 1,174 954
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Other expenses:
Salaries and employee benefits 889 737 2,535 2,065
Occupancy expense 346 299 1,016 830
Other operating expenses 378 344 1,043 1,004
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Total other expenses 1,613 1,380 4,594 3,899
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Income before income taxes 1,110 481 2,736 1,006
Income taxes 403 165 978 324
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NET INCOME 707 316 1,758 682
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NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE: 0.37 0.17 0.92 0.37
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NET INCOME PER COMMON SHARE -
ASSUMING FULL DILUTION: 0.37 0.17 0.91 0.37
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</TABLE>
3
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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Nine Months Ended
September 30,
Increase (decrease) in cash and due from banks 1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,758 682
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 435 307
Provision for loan losses 290 230
(Gain) loss on sale of securities (56) (36)
(Gain) on sale of loans sold (71) -
Increase in accrued income receivable (177) (274)
Deferred income taxes - 30
(Increase) in other assets (13) (358)
(Decrease) increase in other liabilities (83) 479
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Net cash provided by operating activities 2,083 1,060
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Cash flows from investing activities:
Decrease (increase) in federal funds sold 532 -
Proceeds from maturities of securities available-for-sale 8,635 3,004
Proceeds from sale of securities available-for-sale 2,939 5,059
Proceeds from maturities of securities held-to-maturity 834 1,263
Purchases of securities available-for-sale (15,117) (12,426)
Purchases of securities held-to-maturity (2,072) (836)
Loans originated for resale (14,030) (14,644)
Proceeds from sale of loans 13,561 14,428
Net increase in portfolio loans (32,844) (27,288)
Purchases of premises and equipment (318) (1,143)
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Net cash used by investing activities (37,880) (32,583)
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Cash flows from financing activities
Net proceeds from sale of common stock 71 1
Increase in deposits 32,318 37,699
Increase (decrease) in other borrowings 1,530 (4,900)
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Net cash provided by financing activities 33,919 32,800
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Net increase in cash (1,878) 1,277
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 $ 6,093 4,931
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Cash payments for interest $ 5,539 4,084
Cash payments for income taxes $ 1,022 164
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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 nine month period ended September 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
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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. In August, 1996
the Bank opened an insurance subsidiary, Hometown Insurance Agency. The agency
is located in the Bank's Spring Hill facility.
FINANCIAL CONDITION
Total assets have grown $35.1 million since December 31, 1995, for a total of
$197.5 million at September 30, 1996. The growth has been mostly funded by a
$32.3 million increase in deposits.
The Bank continues to experience excellent loan demand as demonstrated by the
30.0% or $32.6 million growth in net loans since December 31, 1995, to $141.9
million at September 30, 1996. Securities available-for-sale increased $2.8
million or 8.3% while securities held-to-maturity increased $1.2 million or
34.9% during the nine months ended September 30, 1996.
Premises and equipment decreased slightly by $23,000 since December 31, 1995.
Accrued income receivable increased $177,000 or 13.5% since December 31, 1995.
This increase is due to the combined increase of $36.6 million in loans and
securities since December 31, 1995.
The allowance for loan losses increased $289,000 since December 31, 1995, for a
total of $1,351,000 or approximately .93% of total loans. This increase is
primarily additional provision for loan losses to allow for growth in the loan
portfolio. Charge-offs exceeded recoveries by $1,000 during the first nine
months of 1996. Asset quality remains good and management believes that the
allowance for loan losses is adequate at September 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 September 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
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Liquidity is at an adequate level with cash and due from banks of $6.1 million
at September 30, 1996. Loans and securities scheduled to mature within one year
exceed $81 million at September 30, 1996, which should provide further
liquidity. In addition, approximately $36 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 $7.5 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 $780,000 in federal funds purchased outstanding at
September 30, 1996. The Bank has approximately $20.5 million in brokered
deposits at September 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 $17.0 million in loan commitments are expected to be funded within
the next six months. Furthermore, the Bank has approximately $23.1 million of
other loan commitments, primarily unused lines and letters of credit, which may
or may not be funded.
The Bank has recently filed application with the Office of the Comptroller of
the Currency (OCC) to open a branch in Fairview, Tennessee. A contract to
purchase land has been negotiated and building cost have been evaluated.
Expenditures related to the project are expected to be approximately $600,000.
Pending OCC approval, the Bank plans to purchase property and open this branch
during the first half of 1997. 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 $1.9 million during
the nine months ended September 30, 1996 as compared to a $1.3 million increase
for the same period in 1995. Cash provided by operating activities increased
$1.0 million during the first nine months of 1996, as compared to the same
period in 1995.
Net cash used by investing activities increased $5.3 million during the first
nine months of 1996 compared to the same period in 1995. The net increase in
portfolio loans used $5.6 million additional funds for the nine months ended
September 30, 1996 as compared to the same period in 1995. Due to increases in
the securities portfolio, investing activities required $3.9 million more use of
funds during the nine months September 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 $1.1 million during the first
nine months of 1996 as compared to the same period in 1995. The increase is
attributable to $1.5 million increase in other borrowings during the first nine
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 $5.4 million smaller
increase in deposits during the first nine months of 1996 as compared to the
same period in 1995.
7
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Equity capital exceeds regulatory requirements at September 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% 10.1%
</TABLE>
The Company contributed $1 million of additional capital to the Bank during the
nine months ended September 30, 1996. The capital was funded from a $750,000
draw against the Company's line of credit and cash on hand.
RESULTS OF OPERATIONS
The Company had net income of $707,000 in the third quarter and $1.8 million for
the first nine months of 1996 compared to net income of $316,000 and $682,000
for the same periods in 1995, respectively. Net income for the third quarter and
nine months ended September 30, 1996 increased $391,000 and $1.1 million,
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 nine
months ended September 30, 1996 as compared to the same periods in 1995.
Total interest income increased $1.2 million or 39.4% in the three month period
ended September 30, 1996 and $3.5 million or 41.0% for the first nine 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 nine months of 1996, compared to the first nine months of 1995, offset
slightly by a decrease in interest rates during the first nine months of 1996 as
compared with the same period in 1995. Total interest expense increased $447,000
or 28.4% in the third quarter, and $1.2 million or 28.4% in the first nine
months of 1996 as compared to the same periods in 1995. Total deposits have
increased 21.5% from December 31, 1995 and 33.7% from September 30, 1995. The
increase in deposits is the primary reason for the increase in interest expense.
Net interest income increased $789,000 or 50.4% during the third quarter, and
$2.3 million or 54.2% in the first nine months of 1996 as compared to the prior
year. Total earning assets increased 35.3% since September 30, 1995 and was the
primary factor in the increase in net interest margin.
The provision for loan losses was $70,000 for the three months ended September
30, 1996 and 1995. The year-to-date provision is $290,000 for the nine months
ended September 30, 1996 as compared to $230,000 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 $438,000 in the third quarter of 1996 is $73,000 or 20.0%
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 $1.2 million for the nine months ended September 30,
1996 increased $220,000 or 23.1% from the same period in 1995. Factors
contributing to this increase is a gain on sale of loans of $71,000 and $20,000
increase in gains on securities transactions offset partially by a $7,000
decrease in mortgage banking fees. Service charges on deposit accounts has
increased $172,000 or 35.9% for the first nine 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.
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Total other expenses increased $233,000 or 16.9% during the third quarter and
$695,000 or 17.8% for the first nine months 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.
9
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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
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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 September 30, 1996.
10
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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: November 12, 1996 By: /s/ Richard E. Herrington
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Richard E. Herrington, President and Chief
Executive Officer (principal executive,
financial and accounting officer)
11
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,093
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,642
<INVESTMENTS-CARRYING> 4,773
<INVESTMENTS-MARKET> 4,744
<LOANS> 145,214
<ALLOWANCE> 1,351
<TOTAL-ASSETS> 197,498
<DEPOSITS> 182,686
<SHORT-TERM> 1,530
<LIABILITIES-OTHER> 912
<LONG-TERM> 0
0
0
<COMMON> 4,324
<OTHER-SE> 8,046
<TOTAL-LIABILITIES-AND-EQUITY> 197,498
<INTEREST-LOAN> 10,140
<INTEREST-INVEST> 1,823
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 12,022
<INTEREST-DEPOSIT> 5,530
<INTEREST-EXPENSE> 5,576
<INTEREST-INCOME-NET> 6,446
<LOAN-LOSSES> 290
<SECURITIES-GAINS> 56
<EXPENSE-OTHER> 4,594
<INCOME-PRETAX> 2,736
<INCOME-PRE-EXTRAORDINARY> 2,736
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,758
<EPS-PRIMARY> .92
<EPS-DILUTED> .91
<YIELD-ACTUAL> 4.63
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 172
<ALLOWANCE-OPEN> 1,062
<CHARGE-OFFS> 12
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 1,351
<ALLOWANCE-DOMESTIC> 27
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,324
</TABLE>
