<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, 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
---- ---
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 3,484,616
-------------------------- -----------------------------
Class Outstanding at August 8, 1997
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,
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 8,323 8,272
Federal funds sold 590 233
Interest-bearing deposits in financial institutions -- --
Investment securities available-for-sale, at fair value 23,803 18,990
Mortgage-backed securities available-for-sale, at fair value 25,486 20,042
Investment securities held-to-maturity, market value $3,574,000
at June 30, 1997 and $3,842,000 December 31, 1996 3,448 3,762
Mortgage-backed securities held-to-maturity, market value
$1,203,000 at June 30, 1997 and $1,438,000
at December 31, 1996 1,199 1,432
Loans held for resale, at cost, which approximates market 5,617 3,980
Loans - portfolio 176,492 153,474
Allowance for loan losses (1,687) (1,472)
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Loans, net 174,805 152,002
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Premises and equipment 5,811 4,682
Accrued income receivable 1,831 1,549
Other assets 1,023 723
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$251,936 215,667
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 25,136 27,375
Interest-bearing 201,387 172,536
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Total deposits 226,523 199,911
Advances from Federal Home Loan Bank
and other borrowings 8,632 1,050
Other liabilities 1,368 1,202
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Total liabilities 236,523 202,163
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Stockholders' equity:
Common stock, No par value. Authorized
10,000,000 shares; issued 3,484,116 and 3,465,094
at June 30, 1997 and December 31, 1996,
respectively 9,699 9,585
Unrealized gain (loss) on securities available-for-sale 88 51
Retained earnings 5,626 3,868
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Total stockholders' equity 15,413 13,504
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$251,936 215,667
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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,
Interest income: 1997 1996 1997 1996
------ ----- ----- -----
<S> <C> <C> <C> <C>
Loans, including fees $4,550 3,413 8,707 6,425
Investment securities, taxable 777 525 1,451 1,041
Investment securities, tax-exempt 74 70 147 138
Federal funds sold 16 10 70 41
Deposits in financial institutions -- -- -- 1
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Total interest income 5,417 4,018 10,375 7,646
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Interest expense:
Deposits 2,442 1,804 4,747 3,531
Other borrowings 164 17 217 24
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Total interest expense 2,606 1,821 4,964 3,555
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Net interest income 2,811 2,197 5,411 4,091
Provision for loan losses 135 125 250 220
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Net interest income after
provision for loan losses 2,676 2,072 5,161 3,871
Other income:
Service charges on deposit accounts 268 232 519 425
Mortgage banking activities 319 57 527 163
Other service charges, commissions and fees 75 78 149 105
Gains on securities transactions 12 13 20 43
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Total other income 674 380 1,215 736
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Other expenses:
Salaries and employee benefits 1,105 837 2,101 1,646
Occupancy expense 425 337 768 670
Other operating expenses 377 366 742 665
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Total other expenses 1,907 1,540 3,611 2,981
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Income before income taxes 1,443 912 2,765 1,626
Income taxes 526 325 1,007 575
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NET INCOME $ 917 587 1,758 1,051
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NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE: $ 0.23 0.15 0.44 0.28
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NET INCOME PER COMMON SHARE -
ASSUMING FULL DILUTION: $ 0.23 0.15 0.43 0.27
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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,
Increase (decrease) in cash and due from banks 1997 1996
-------- ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,758 1,051
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 332 295
Provision for loan losses 250 220
Gain on sale of securities (20) (43)
Gain on sale of loans sold (26) (41)
Increase in accrued income receivable (282) (112)
Deferred income taxes -- --
Increase in other assets (353) (53)
(Decrease) increase in other liabilities 166 (162)
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Net cash provided by operating activities 1,825 1,155
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Cash flows from investing activities:
Increase in federal funds sold (357) 532
Proceeds from maturities of securities available-for-sale 4,904 6,503
Proceeds from sale of securities available-for-sale 2,561 2,209
Proceeds from maturities of securities held-to-maturity 773 987
Purchases of securities available-for-sale (17,674) (10,030)
Purchases of securities held-to-maturity (235) (1,296)
Loans originated for resale (19,795) (7,477)
Proceeds from sale of loans 22,500 8,182
Net increase in portfolio loans (27,369) (25,930)
Purchases of premises and equipment (1,390) (272)
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Net cash used by investing activities (36,082) (26,592)
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Cash flows from financing activities
Net proceeds from sale of common stock 114 4
Increase in deposits 26,612 24,298
Increase in other borrowings 7,582 1,227
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Net cash provided by financing activities 34,308 25,529
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Net decrease in cash 51 92
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 $ 8,323 8,063
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Cash payments for interest $ 4,703 3,559
Cash payments for income taxes $ 1,204 671
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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 month period ended June 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 during the second quarter of 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 $36.3 million since December 31, 1996, for a total of
$251.9 million at June 30, 1997. The growth has been mostly funded by a $26.6
and $6.8 million increase in deposits and other borrowings, respectively.
The Bank continues to experience excellent loan demand as demonstrated by the
15.0% or $22.8 million growth in net loans since December 31, 1996, to $174.8
million at June 30, 1997. Securities available-for-sale increased $10.3 million
or 26.3% while securities held-to-maturity decreased $547,000 or 10.5% during
the six months ended June 30, 1997.
Premises and equipment increased by $1.1 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 $282,000 or 18.2% since December 31, 1996.
This increase is due to the combined increase of $31.9 million in loans and
securities since December 31, 1996.
The allowance for loan losses increased $215,000 since December 31, 1996, for a
total of $1,687,000 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 $35,000 during the first six months of 1997. Asset
quality remains good and management believes that the allowance for loan losses
is adequate at June 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 June 30, 1997 and past due loans, at
.14% 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 $8.3 million
at June 30, 1997. Loans and securities scheduled to mature within one year
exceed $101 million at June 30, 1997, which should provide further liquidity.
In addition, approximately $49.3 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 $2.1 million in borrowings against its line of credit
and the Bank has no federal funds purchased outstanding at June 30, 1997.
During March, 1997, the Bank entered into a $4.4 million repurchase agreement
to further develop relationship with a customer. This is included in other
borrowings. The Bank has approximately $37.4 million in brokered deposits at
June 30, 1997 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 $21.6 million in loan commitments are expected to be funded
within the next six months. Furthermore, the Bank has approximately $26.9
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. 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 plans on housing its mortgage division, loan operations
and credit department functions at this location. Expenditures relating to
leasehold improvements are estimated at $300,000. 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 $51,000 during the
six months ended June 30, 1997 as compared to a $92,000 increase for the same
period in 1996. Cash provided by operating activities increased $670,000 during
the first six months of 1997, as compared to the same period in 1996. This
increase is partially due to an increase in net income of $707,000 for the six
months ended June 30, 1997 as compared to the previous year.
Net cash used by investing activities increased $9.4 million during the first
six months of 1997 compared to the same period in 1996. The net increase in
portfolio loans used $1.4 million more in funds for the six months ended June
30, 1997 as compared to the same period in 1996. Due to increases in the
securities portfolio, investing activities required $8.0 million more use of
funds during the six months June 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 $8.8 million during the first
six months of 1997 as compared to the same period in 1996. The increase is
attributable to a $6.4 million increase in other borrowings and a $2.3 million
increase in deposits during the first six months of 1997 as compared to the
same period in 1996.
7
<PAGE> 8
Equity capital exceeds regulatory requirements at June 30, 1997, at 7.1% 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% 6.3% 4.0% 8.4% 8.0% 9.3%
Bank 3.0% 7.1% 4.0% 9.4% 8.0% 10.3%
</TABLE>
The Company contributed $900,000 of additional capital to the Bank during the
six months ended June 30, 1997. The capital was funded from a $850,000 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 $917,000 in the second quarter and $1.8 million
for the first six months of 1997 compared to net income of $587,000 and $1.1
million for the same periods in 1996, respectively. Net income for the second
quarter and six months ending June 30, 1997 increased $330,000 and $707,000,
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 six months ended June 30, 1997 as compared to the
same periods in 1996.
Total interest income increased $1.4 million or 34.8% in the three month period
ended June 30, 1997 and $2.7 million or 35.7% for the first six 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 half of 1997 compared to 1996. Total
interest expense increased $785,000 or 43.1% in the second quarter and $1.4
million or 39.6% in the first half of 1997 as compared to the same periods in
1996. Total interest-bearing liabilities have increased 21.0% from December 31,
1996 and 37.3% from June 30, 1996. The increases in deposits and other
borrowings are the primary reasons for the increase in interest expense. Net
interest income increased $614,000 or 27.9% during the second quarter of 1997
and $1.3 million or 32.3% in the first half of 1997 as compared to the prior
year. Total earning assets increased 35.8% since June 30, 1996 and was the
primary factor in the increase in net interest margin.
The provision for loan losses was $135,000 for the three months ended June 30,
1997 as compared to $125,000 for the same period in 1996. The year-to-date
provision is $250,000 for the six months ended June 30, 1997 as compared to
$220,000 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 $674,000 in the second quarter of 1997 is $294,000 or
77.4% more than one year earlier. The increase is primarily attributed to an
increase in mortgage banking fees which is attributed to an increase in loans
originated. Total other income of $1.2 million for the six months ended June
30, 1997 is $479,000 or 65.1% more than the same period in 1996. Mortgage
banking fees increased $364,000 or 223% for the six months ended June 30, 1997
as compared to the same period in 1996. The increase in total other income for
the first half 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 $367,000 or 23.8% during the second quarter and
$630,000 or 21.1% for the first half 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 20, 1997, the Company held its 1997 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 1,405,269 0
Gordon E. Inman 1,405,269 0
Charles R. Lanier 1,405,269 0
D. Wilson Overton 1,405,269 0
Edward M. Richey 1,405,269 0
Edward P. Silva 1,405,269 0
</TABLE>
An amendment was approved to the Company's Charter to (a) increase the
number of authorized shares of common stock from 5,000,000 to 10,000,000 shares
and (b) reduce the par value of the Company's common stock from the current par
value of $2.50 per share to no par value per share. The number of votes cast
for the amendment was 1,405,169 with 100 votes 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. A Form 8-K was filed during the quarter
ended June 30, 1997.
Form 8-K was filed on May 21, 1997 regarding change in
certifying accountant from Heathcott & Mullaly, P.C. to
Deloitte & Touche LLP.
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: August 8, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,323
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 590
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,289
<INVESTMENTS-CARRYING> 4,647
<INVESTMENTS-MARKET> 4,777
<LOANS> 182,109
<ALLOWANCE> 1,687
<TOTAL-ASSETS> 251,936
<DEPOSITS> 226,523
<SHORT-TERM> 7,881
<LIABILITIES-OTHER> 1,368
<LONG-TERM> 751
0
0
<COMMON> 9,699
<OTHER-SE> 5,714
<TOTAL-LIABILITIES-AND-EQUITY> 251,936
<INTEREST-LOAN> 8,707
<INTEREST-INVEST> 1,598
<INTEREST-OTHER> 70
<INTEREST-TOTAL> 10,375
<INTEREST-DEPOSIT> 4,747
<INTEREST-EXPENSE> 4,964
<INTEREST-INCOME-NET> 5,411
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 3,611
<INCOME-PRETAX> 2,765
<INCOME-PRE-EXTRAORDINARY> 2,765
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,758
<EPS-PRIMARY> .44
<EPS-DILUTED> .43
<YIELD-ACTUAL> 4.91
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 180
<ALLOWANCE-OPEN> 1,472
<CHARGE-OFFS> 40
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 1,687
<ALLOWANCE-DOMESTIC> 16
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,671
</TABLE>
