<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, 1997 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
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, No Par Value 3,492,882
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Class Outstanding at November 10, 1997
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE> 2
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 1997 1996
<S> <C> <C>
Cash and due from banks $ 9,662 8,272
Federal funds sold 4,307 233
Investment securities available-for-sale, at fair value 26,308 18,990
Mortgage-backed securities available-for-sale, at fair value 28,111 20,042
Investment securities held-to-maturity, market value $3,892,000
at September 30, 1997 and $3,842,000 December 31, 1996 3,739 3,762
Mortgage-backed securities held-to-maturity, market value
$912,000 at September 30, 1997 and $1,438,000
at December 31, 1996 909 1,432
Loans held for resale, at cost, which approximates market 5,672 3,980
Loans - portfolio 184,638 153,474
Allowance for loan losses (1,777) (1,472)
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Loans, net 182,861 152,002
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Premises and equipment 6,259 4,682
Accrued income receivable 1,893 1,549
Other assets 964 723
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$ 270,685 215,667
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 30,234 27,375
Interest-bearing 215,021 172,536
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Total deposits 245,255 199,911
Advances from Federal Home Loan Bank
and other borrowings 7,452 1,050
Other liabilities 1,363 1,202
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Total liabilities 254,070 202,163
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Stockholders' equity:
Common stock, No par value. Authorized
10,000,000 shares; issued 3,492,882 and 3,465,094
at September 30, 1997 and December 31, 1996,
respectively 9,774 9,585
Unrealized gain on securities available-for-sale 207 51
Retained earnings 6,634 3,868
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Total stockholders' equity 16,615 13,504
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$ 270,685 215,667
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</TABLE>
2
<PAGE> 3
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: 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loans, including fees $4,971 3,715 13,678 10,140
Investment securities, taxable 854 577 2,305 1,618
Investment securities, tax-exempt 74 67 221 205
Federal funds sold 71 17 141 58
Deposits in financial institutions -- -- -- 1
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Total interest income 5,970 4,376 16,345 12,022
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Interest expense:
Deposits 2,823 1,999 7,570 5,530
Other borrowings 136 22 353 46
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Total interest expense 2,959 2,021 7,923 5,576
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Net interest income 3,011 2,355 8,422 6,446
Provision for loan losses 85 70 335 290
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Net interest income after
provision for loan losses 2,926 2,285 8,087 6,156
Other income:
Service charges on deposit accounts 268 226 787 651
Mortgage banking activities 257 174 784 337
Other service charges, commissions and fees 117 25 266 130
Gains on securities transactions 20 13 40 56
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Total other income 662 438 1,877 1,174
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Other expenses:
Salaries and employee benefits 1,116 889 3,217 2,535
Occupancy expense 425 346 1,193 1,016
Other operating expenses 454 378 1,196 1,043
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Total other expenses 1,995 1,613 5,606 4,594
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Income before income taxes 1,593 1,110 4,358 2,736
Income taxes 585 403 1,592 978
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NET INCOME 1,008 707 2,766 1,758
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NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE: $ 0.24 0.18 0.68 0.46
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NET INCOME PER COMMON SHARE -
ASSUMING FULL DILUTION: $ 0.24 0.18 0.67 0.46
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</TABLE>
3
<PAGE> 4
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 1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,766 1,758
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 495 435
Provision for loan losses 335 290
Gain on sale of securities (40) (56)
Gain on sale of loans sold (55) (71)
Increase in accrued income receivable (344) (177)
Increase in other assets (385) (13)
(Decrease) increase in other liabilities 161 (83)
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Net cash provided by operating activities 2,933 2,083
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Cash flows from investing activities:
Increase in federal funds sold (4,074) 532
Proceeds from maturities of securities available-for-sale 14,709 8,635
Proceeds from sale of securities available-for-sale 6,539 2,939
Proceeds from maturities of securities held-to-maturity 810 834
Purchases of securities available-for-sale (36,378) (15,117)
Purchases of securities held-to-maturity (276) (2,072)
Loans originated for resale (27,106) (14,030)
Proceeds from sale of loans 33,614 13,561
Net increase in portfolio loans (39,339) (32,844)
Purchases of premises and equipment (1,977) (318)
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Net cash used by investing activities (53,478) (37,880)
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Cash flows from financing activities
Net proceeds from sale of common stock 189 71
Increase in deposits 45,344 32,318
Increase in other borrowings 6,402 1,530
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Net cash provided by financing activities 51,935 33,919
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Net increase (decrease) in cash 1,390 (1,878)
Cash and due from banks at beginning of period 8,272 7,971
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Cash and due from banks at end of period $ 9,662 6,093
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Cash payments for interest $ 7,738 5,539
Cash payments for income taxes $ 1,740 1,022
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</TABLE>
4
<PAGE> 5
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 three and nine month periods ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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, 1996.
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. The Bank opened
its fourth full service branch in May, 1997. 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 $55.0 million since December 31, 1996, for a total of
$270.7 million at September 30, 1997. The growth has been mostly funded by a
$45.3 and $6.4 million increase in deposits and other borrowings, respectively.
The Bank continues to experience excellent loan demand as demonstrated by the
20.3% or $30.9 million growth in net loans since December 31, 1996, to $182.9
million at September 30, 1997. Securities available-for-sale increased $15.4
million or 39.4% while securities held-to-maturity decreased $546,000 or 10.5%
during the nine months ended September 30, 1997.
Premises and equipment increased by $1.6 million since December 31, 1996. The
Company purchased its Williamson Square Branch in January 1997 for $980,000.
The building was previously leased from an unrelated third party. Also in
January, 1997, the Bank purchased a parcel of land in Fairview, Tennessee for
$140,000 and has located a full service branch facility on this property.
Accrued income receivable increased $344,000 or 22.2% since December 31, 1996.
This increase is due to the combined increase of $47.7 million in loans and
securities since December 31, 1996.
The allowance for loan losses increased $305,000 since December 31, 1996, for a
total of $1,777,000 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 were $30,000 during the first nine months of 1997. Asset
quality remains good and management believes that the allowance for loan losses
is adequate at September 30, 1997. 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, 1997 and past due loans,
at .15% of total loans, are substantially below the peer group average.
6
<PAGE> 7
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.
Liquidity is at an adequate level with cash and due from banks of $9.7 million
at September 30, 1997. Loans and securities scheduled to mature within one year
exceed $119 million at September 30, 1997, which should provide further
liquidity. In addition, approximately $54.4 million of securities are
classified as available-for-sale to help meet liquidity needs should they
arise. The Company has lines of credit of $6.0 million with lending
institutions and the Bank is approved to borrow up to $5.0 million in funds
from the Federal Home Loan Bank and $14.5 million in federal funds lines to
assist with capital and liquidity needs. The Company has $2.3 million in
borrowings against its line of credit and the Bank has no federal funds
purchased outstanding at September 30, 1997. During March, 1997, the Bank
entered into a $4.4 million repurchase agreement to further develop it's
relationship with a customer. This is included in other borrowings. The Bank
has approximately $35.1 million in brokered deposits at September 30, 1997 to
help fund strong loan demand. The majority of these deposits are $100,000 or
less, but they are generally considered to be more volatile than the Bank's
core deposit base.
Approximately $22.0 million in loan commitments are expected to be funded
within the next six months. Furthermore, the Bank has approximately $26.4
million of other loan commitments, primarily unused lines and letters of
credit, which may or may not be funded.
Expenditures related to the permanent facility of the full service branch in
Fairview, Tennessee are expected to be approximately $250,000 and construction
is scheduled to begin during the fourth quarter of 1997. During the second
quarter of 1997, the Bank entered into a lease agreement with Gordon E. Inman,
Chairman of the Company, for a 9,000 square foot building which adjoins the
Bank's main office building property. The annual lease payments on this
facility are approximately $108,000. This lease was entered into on terms no
less favorable to the Bank than it could have obtained from a non-affiliated
third party. The Bank houses its mortgage division, loan operations and credit
department functions at this location. 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 $1.4 million
during the nine months ended September 30, 1997 as compared to a $1.9 million
decrease for the same period in 1996. Cash provided by operating activities
increased $850,000 during the first nine months of 1997, as compared to the
same period in 1996. This increase is due to an increase in net income of $1.0
million partially offset by a $372,000 increase in other assets for the nine
months ended September 30, 1997 as compared to the previous year.
Net cash used by investing activities increased $15.6 million during the first
nine months of 1997 compared to the same period in 1996. The net increase in
portfolio loans used $6.5 million more in funds for the nine months ended
September 30, 1997 as compared to the same period in 1996. Due to increases in
the securities portfolio, investing activities required $9.8 million more use
of funds during the nine months September 30, 1997 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
the cash flow requirements.
Cash provided by financing activities increased $18.0 million during the first
nine months of 1997 as compared to the same period in 1996. The increase is
attributable to a $4.9 million increase in other borrowings and a $13.0 million
increase in deposits during the first nine months of 1997 as compared to the
same period in 1996.
7
<PAGE> 8
Equity capital exceeds regulatory requirements at September 30, 1997, at 6.2%
of average 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% 6.2% 4.0% 8.6% 8.0% 9.6%
Bank 3.0% 7.0% 4.0% 9.7% 8.0% 10.7%
</TABLE>
The Company contributed $1.1 million of additional capital to the Bank during
the nine months ended September 30, 1997. The capital was funded from a $1.0
million draw against the Company's line of credit and cash on hand. The Company
announced a 2-for-1 stock split which was payable on May 21, 1997 to
shareholders of record on May 1, 1997. At the Annual Shareholder's meeting, the
shareholder's approved the par value of the Company's common stock be changed
from $2.50 per share to no par. They also approved authorized shares of the
Company's common stock be increased from 5 to 10 million shares.
RESULTS OF OPERATIONS
The Company had net income of $1.0 million in the third quarter and $2.8
million for the first nine months of 1997 compared to net income of $707,000
and $1.8 million for the same periods in 1996, respectively. Net income for the
third quarter and nine months ending September 30, 1997 increased $301,000 and
$1.0 million, respectively, as compared to the same periods in 1996. Increases
in net interest income and mortgage banking fees 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, 1997 as
compared to the same periods in 1996.
Total interest income increased $1.6 million or 36.4% in the three month period
ended September 30, 1997 and $4.3 million or 36.0% for the first nine months of
1997 compared to the same periods in 1996. The increase in total interest income
is primarily attributable to the similar increase in average earning assets and
an increase in prime rate for the first nine months of 1997 compared to 1996.
Total interest expense increased $938,000 or 46.4% in the third quarter and $2.3
million or 42.1% in the first nine months of 1997 as compared to the same
periods in 1996. Total interest-bearing liabilities have increased 25.7% from
December 31, 1996 and 37.2% from September 30, 1996. The increases in deposits
and other borrowings are the primary reasons for the increase in interest
expense. Net interest income increased $656,000 or 27.9% during the third
quarter of 1997 and $2.0 million or 30.7% in the first nine months of 1997 as
compared to the prior year. Total earning assets increased 36.7% since September
30, 1996 and was the primary factor in the increase in net interest margin.
The provision for loan losses was $85,000 for the three months ended September
30, 1997 as compared to $70,000 for the same period in 1996. The year-to-date
provision is $335,000 for the nine months ended September 30, 1997 as compared
to $290,000 for the same period in 1996. 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.
8
<PAGE> 9
Total other income of $662,000 in the third quarter of 1997 is $224,000 or 33.8%
more than the same period in 1996. The increase is primarily attributed to an
increase in mortgage banking fees resulting from an increase in loans
originated. Total other income of $1.9 million for the nine months ended
September 30, 1997 is $703,000 or 60.0% more than the same period in 1996.
Mortgage banking fees increased $447,000 or 133% for the nine months ended
September 30, 1997 as compared to the same period in 1996. The increase in total
other income for the first nine months of 1997 is also attributed to an increase
in service charges on deposit accounts as the Bank's deposit base continues to
grow.
Total other expenses increased $382,000 or 23.7% during the third quarter and
$1.0 million or 22.0% for the first nine months of 1997 as compared to the same
periods in 1996. The increases are attributable to additional personnel and
other incremental costs related to the overall growth of the Bank.
ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards No. 128
"Earnings Per Share" for the year ended December 31, 1997. This accounting
pronouncement requires the disclosure of basic and diluted earnings per share.
The Company believes that, upon adoption, diluted earnings per share will
approximate earnings per share as previously reported. Because the concept of
basic earnings per share does not include the impact of common stock
equivalents, such as preferred stock and stock options, basic earnings per
share will be significantly higher than diluted earnings per share.
9
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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(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 reports on Form 8-K were filed during
the quarter ended September 30, 1997.
10
<PAGE> 11
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 10, 1997 By: /s/ Richard E. Herrington
----------------- -------------------------
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,662
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,307
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,419
<INVESTMENTS-CARRYING> 4,648
<INVESTMENTS-MARKET> 4,804
<LOANS> 190,310
<ALLOWANCE> 1,777
<TOTAL-ASSETS> 270,685
<DEPOSITS> 245,255
<SHORT-TERM> 6,701
<LIABILITIES-OTHER> 1,363
<LONG-TERM> 751
0
0
<COMMON> 9,774
<OTHER-SE> 6,841
<TOTAL-LIABILITIES-AND-EQUITY> 270,685
<INTEREST-LOAN> 13,678
<INTEREST-INVEST> 2,526
<INTEREST-OTHER> 141
<INTEREST-TOTAL> 16,345
<INTEREST-DEPOSIT> 7,570
<INTEREST-EXPENSE> 7,923
<INTEREST-INCOME-NET> 8,422
<LOAN-LOSSES> 335
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 5,606
<INCOME-PRETAX> 4,358
<INCOME-PRE-EXTRAORDINARY> 4,358
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,766
<EPS-PRIMARY> .68
<EPS-DILUTED> .67
<YIELD-ACTUAL> 4.43
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 101
<ALLOWANCE-OPEN> 1,472
<CHARGE-OFFS> 41
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 1,777
<ALLOWANCE-DOMESTIC> 62
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,715
</TABLE>
