<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, 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, $2.50 Par Value 1,736,308
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Class Outstanding at May 12, 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)
March 31, December 31,
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 6,800 8,272
Federal funds sold 2,122 233
Interest-bearing deposits in financial institutions - -
Investment securities available-for-sale, at fair value 23,635 18,990
Mortgage-backed securities available-for-sale, at fair value 22,300 20,042
Investment securities held-to-maturity, market value $3,979,000
at March 31, 1997 and $3,842,000 December 31, 1996 3,748 3,762
Mortgage-backed securities held-to-maturity, market value
$1,122,000 at March 31, 1997 and $1,438,000
at December 31, 1996 1,310 1,432
Loans held for resale, at cost, which approximates market 4,968 3,980
Loans - portfolio 163,911 153,474
Allowance for loan losses (1,574) (1,472)
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Loans, net 162,337 152,002
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Premises and equipment 5,790 4,682
Accrued income receivable 1,727 1,549
Other assets 1,233 723
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$ 235,970 215,667
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 23,323 27,375
Interest-bearing 190,844 172,536
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Total deposits 214,167 199,911
Advances from Federal Home Loan Bank
and other borrowings 5,951 1,050
Other liabilities 1,792 1,202
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Total liabilities 221,910 202,163
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Stockholders' equity:
Common stock, $2.50 par value. Authorized
5,000,000 shares; issued 1,736,308 and 1,732,547
at March 31, 1997 and December 31, 1996,
respectively 4,341 4,331
Additional paid-in capital 5,290 5,254
Unrealized gain (loss) on securities available-for-sale (280) 51
Retained earnings 4,709 3,868
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Total stockholders' equity 14,060 13,504
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$235,970 215,667
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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
March 31,
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans, including fees $ 4,157 3,012
Investment securities, taxable 674 516
Investment securities, tax-exempt 73 68
Federal funds sold 54 31
Deposits in financial institutions - 1
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Total interest income 4,958 3,628
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Interest expense:
Deposits 2,305 1,727
Other borrowings 53 7
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Total interest expense 2,358 1,734
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Net interest income 2,600 1,894
Provision for loan losses 115 95
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Net interest income after
provision for loan losses 2,485 1,799
Other income:
Service charges on deposit accounts 251 193
Mortgage banking activities 208 106
Other service charges, commissions and fees 74 27
Gains on securities transactions 8 30
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Total other income 541 356
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Other expenses:
Salaries and employee benefits 996 809
Occupancy expense 343 333
Other operating expenses 365 299
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Total other expenses 1,704 1,441
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Income before income taxes 1,322 714
Income taxes 481 250
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NET INCOME $ 841 464
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NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE: $ 0.43 0.25
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NET INCOME PER COMMON SHARE -
ASSUMING FULL DILUTION: $ 0.43 0.25
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</TABLE>
3
<PAGE> 4
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended
March 31,
Increase (decrease) in cash and due from banks 1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 841 464
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 160 125
Provision for loan losses 115 95
Gain on sale of securities (8) (30)
Gain on sale of loans sold (20) -
Increase in accrued income receivable (178) (88)
Deferred income taxes - -
(Increase) decrease in other assets (321) 19
(Decrease) increase in other liabilities 592 (7)
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Net cash provided by operating activities 1,181 578
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Cash flows from investing activities:
Increase in federal funds sold (1,889) (1,013)
Proceeds from maturities of securities available-for-sale 2,849 3,518
Proceeds from sale of securities available-for-sale 1,421 1,607
Proceeds from maturities of securities held-to-maturity 468 434
Purchases of securities available-for-sale (11,820) (6,714)
Purchases of securities held-to-maturity (235) (58)
Loans originated for resale (8,487) (4,875)
Proceeds from sale of loans 8,580 4,995
Net increase in portfolio loans (11,511) (12,822)
Purchases of premises and equipment (1,232) (94)
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Net cash used by investing activities (21,856) (15,022)
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Cash flows from financing activities
Net proceeds from sale of common stock 46 2
Increase in deposits 14,256 12,245
Increase in other borrowings 4,901 -
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Net cash provided by financing activities 19,203 12,247
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Net decrease in cash (1,472) (2,197)
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 $ 6,800 5,774
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Cash payments for interest $ 2,169 1,737
Cash payments for income taxes $ 313 99
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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 three month period ended March 31, 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 has
received approval and plans to open 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 $20.3 million since December 31, 1996, for a total of
$236.0 million at March 31, 1997. The growth has been mostly funded by a $14.3
and $4.9 million increase in deposits and other borrowings, respectively.
The Bank continues to experience excellent loan demand as demonstrated by the
6.8% or $10.3 million growth in net loans since December 31, 1996, to $162.3
million at March 31, 1997. Securities available-for-sale increased $6.9 million
or 17.6% while securities held-to-maturity decreased $136,000 or 2.6% during the
three months ended March 31, 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 plans to locate a full service branch facility on this property.
Accrued income receivable increased $178,000 or 3.8% since December 31, 1996.
This increase is due to the combined increase of $17.1 million in loans and
securities since December 31, 1996.
The allowance for loan losses increased $102,000 since December 31, 1996, for a
total of $1,574,000 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 $13,000 during the first three months of 1997. Asset
quality remains good and management believes that the allowance for loan losses
is adequate at March 31, 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 March 31, 1997 and past due loans, at
.17% 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 $6.8 million
at March 31, 1997. Loans and securities scheduled to mature within one year
exceed $100 million at March 31, 1997, which should provide further liquidity.
In addition, approximately $46 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 $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 $1.5 million in borrowings against its line of credit and
the Bank has no federal funds purchased outstanding at March 31, 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 $31.2 million in brokered deposits at
March 31, 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 $18.5 million in loan commitments are expected to be funded within
the next six months. Furthermore, the Bank has approximately $22.7 million of
other loan commitments, primarily unused lines and letters of credit, which may
or may not be funded.
Expenditures related to the full service branch in Fairview, Tennessee are
expected to be approximately $350,000. During the second quarter of 1997, the
Bank plans to enter 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 Bank plans on housing its mortgage division, loan
operations and credit department functions at this location. Expenditures
relating to leasehold improvements are estimated at $100,000. 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 decrease in cash and due from banks of $1.5 million during
the three months ended March 31, 1997 as compared to a $2.2 million decrease for
the same period in 1996. Cash provided by operating activities increased
$600,000 during the first three months of 1997, as compared to the same period
in 1996. This increase is partially due to an increase in net income of $377,000
for the three months ended March 31, 1997 as compared to the previous year.
Net cash used by investing activities increased $6.8 million during the first
three months of 1997 compared to the same period in 1996. The net increase in
portfolio loans used $1.3 million less funds for the three months ended March
31, 1997 as compared to the same period in 1996. Due to increases in the
securities portfolio, investing activities required $6.1 million more use of
funds during the three months March 31, 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 $3.0 million during the first
three 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 $2.0 million
increase in deposits during the first three months of 1997 as compared to the
same period in 1996.
7
<PAGE> 8
Equity capital exceeds regulatory requirements at March 31, 1997, at 6.1% 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% 6.1% 4.0% 8.3% 8.0% 9.2%
Bank 3.0% 6.6% 4.0% 9.0% 8.0% 9.9%
</TABLE>
The Company contributed $300,000 of additional capital to the Bank during the
three months ended March 31, 1997. The capital was funded from a $250,000 draw
against the Company's line of credit and cash on hand. The Company has announced
a 2-for-1 stock split payable on May 21, 1997 to shareholders of record on May
1, 1997.
RESULTS OF OPERATIONS
The Company had net income of $841,000 in the first quarter and $1.8 million for
the first three months of 1997 $464,000 for the same period in 1996. Net income
for the first quarter ending March 31, 1997 increased $377,000 as compared to
the same period in 1996. 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, 1997 as compared
to the same period in 1996.
Total interest income increased $1.3 million or 36.7% in the three month period
ended March 31, 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 for the first three months of 1997 compared to 1996. Total
interest expense increased $624,000 or 36.0% in the first quarter as compared to
the same period in 1996. Total interest-bearing deposits have increased 10.6%
from December 31, 1996 and 40.0% from March 31, 1996. The increase in deposits
is the primary reason for the increase in interest expense. Net interest income
increased $706,000 or 37.3% during the first quarter of 1997 as compared to the
prior year. Total earning assets increased 35.9% since March 31, 1996 and was
the primary factor in the increase in net interest margin.
The provision for loan losses was $115,000 for the three months ended March 31,
1997 as compared to $95,000 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.
Total other income of $541,000 in the first quarter of 1997 is $185,000 or 34.2%
more than one year earlier. The increase is partially attributed to an increase
in service charges on deposit accounts as the Bank's deposit base continues to
grow. Other factors contributing to this increase is a gain on sale of loans of
$20,000 offset partially by $22,000 decrease in gains on securities
transactions. Mortgage banking fees increased $102,000 or 96.2% for the three
months ending March 31, 1997 as compared to the same period in 1996. The
increase is primarily attributed to an increase in loans originated.
Total other expenses increased $263,000 or 18.3% during the first quarter of
1997 as compared to the same period in 1996. The increases are attributable to
additional personnel and other incremental costs related to the overall growth
of the Bank.
8
<PAGE> 9
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.
(a) Exhibits. The following exhibits are filed with this report:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
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<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 March 31, 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: May 12, 1997 By: /s/ Richard E. Herrington
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Richard E. Herrington, Presidentand Chief
Executive Officer (principal executive,
financial and accounting officer)
11
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 6,800
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,122
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,935
<INVESTMENTS-CARRYING> 5,058
<INVESTMENTS-MARKET> 5,101
<LOANS> 168,879
<ALLOWANCE> 1,574
<TOTAL-ASSETS> 235,970
<DEPOSITS> 214,167
<SHORT-TERM> 5,951
<LIABILITIES-OTHER> 1,792
<LONG-TERM> 0
0
0
<COMMON> 4,341
<OTHER-SE> 9,719
<TOTAL-LIABILITIES-AND-EQUITY> 235,970
<INTEREST-LOAN> 4,157
<INTEREST-INVEST> 747
<INTEREST-OTHER> 54
<INTEREST-TOTAL> 4,958
<INTEREST-DEPOSIT> 2,305
<INTEREST-EXPENSE> 2,358
<INTEREST-INCOME-NET> 2,600
<LOAN-LOSSES> 115
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 1,704
<INCOME-PRETAX> 1,322
<INCOME-PRE-EXTRAORDINARY> 1,322
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 841
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
<YIELD-ACTUAL> 4.84
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 206
<ALLOWANCE-OPEN> 1,472
<CHARGE-OFFS> 16
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 1,574
<ALLOWANCE-DOMESTIC> 33
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,541
</TABLE>
