<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, 1998 0-24133
FRANKLIN FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(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 7,009,272
-------------------------- ---------------------------
Class Outstanding at May 12, 1998
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)
March 31, December 31,
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 18,973 10,696
Federal funds sold 5,090 --
Investment securities available-for-sale, at fair value 28,132 25,401
Mortgage-backed securities available-for-sale, at fair value 31,569 29,654
Investment securities held-to-maturity, market value $4,822,000
at March 31, 1998 and $5,232,000 December 31, 1997 4,701 5,103
Mortgage-backed securities held-to-maturity, market value
$818,000 at March 31, 1998 and $863,000
at December 31, 1997 822 857
Federal Home Loan and Federal Reserve Bank Stock 1,168 1,129
Loans held for resale, at cost, which approximates market 12,263 3,737
Loans - portfolio 195,403 190,345
Allowance for loan losses (1,886) (1,828)
- ----------------------------------------------------------------------------------------
Loans, net 193,517 188,517
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Premises and equipment 6,435 6,306
Accrued income receivable 2,006 1,890
Other assets 1,453 1,143
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$ 306,129 274,433
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 34,333 28,113
Interest-bearing 241,041 219,459
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Total deposits 275,374 247,572
Advances from Federal Home Loan Bank
and other borrowings 9,459 7,451
Other liabilities 2,386 1,620
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Total liabilities 287,219 256,643
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Stockholders' equity:
Common stock, No par value. Authorized
10,000,000 shares; issued 6,996,272 and 6,990,362
at March 31, 1998 and December 31, 1997,
respectively 9,872 9,820
Unrealized gain on securities available-for-sale 126 214
Retained earnings 8,912 7,756
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Total stockholders' equity 18,910 17,790
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$ 306,129 274,433
========================================================================================
</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,
Interest income: 1998 1997
--------- --------
<S> <C> <C>
Loans, including fees $ 5,138 4,157
Investment securities, taxable 913 674
Investment securities, tax-exempt 83 73
Federal funds sold 19 54
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Total interest income 6,153 4,958
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Interest expense:
Deposits 2,873 2,305
Other borrowings 166 53
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Total interest expense 3,039 2,358
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Net interest income 3,114 2,600
Provision for loan losses 65 115
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Net interest income after
provision for loan losses 3,049 2,485
Other income:
Service charges on deposit accounts 312 251
Mortgage banking activities 325 208
Other service charges, commissions and fees 273 74
Gains on securities transactions 78 8
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Total other income 988 541
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Other expenses:
Salaries and employee benefits 1,300 996
Occupancy expense 425 343
Other operating expenses 487 365
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Total other expenses 2,212 1,704
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Income before income taxes 1,825 1,322
Income taxes 669 481
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NET INCOME $ 1,156 841
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NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE: $ 0.17 0.12
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NET INCOME PER COMMON SHARE -
ASSUMING FULL DILUTION: $ 0.13 0.11
- ------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 4
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended
March 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,156 841
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 210 160
Provision for loan losses 65 115
Gain on sale of securities (78) (8)
Gain on sale of loans sold (32) (20)
Increase in accrued income receivable (116) (178)
Increase in other assets (280) (321)
Increase in other liabilities 766 592
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,691 1,181
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Cash flows from investing activities:
Increase in federal funds sold (5,090) (1,889)
Proceeds from maturities of securities available-for-sale 3,536 2,849
Proceeds from sale of securities available-for-sale 18,103 1,421
Proceeds from maturities of securities held-to-maturity 435 468
Purchases of securities available-for-sale (26,373) (11,809)
Purchases of securities held-to-maturity -- (235)
Purchase of Federal Home Loan and Federal Reserve Stock (39) (11)
Loans originated for resale (23,687) (8,487)
Proceeds from sale of loans 17,117 8,580
Net increase in portfolio loans (6,989) (11,511)
Purchases of premises and equipment (289) (1,232)
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Net cash used by investing activities (23,276) (21,856)
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Cash flows from financing activities
Net proceeds from sale of common stock 52 46
Increase in deposits 27,802 14,256
Increase in other borrowings 2,008 4,901
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Net cash provided by financing activities 29,862 19,203
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Net increase (decrease) in cash 8,277 (1,472)
Cash and due from banks at beginning of period 10,696 8,272
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Cash and due from banks at end of period $ 18,973 6,800
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Cash payments for interest $ 2,936 2,169
Cash payments for income taxes $ 348 313
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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 March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. 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, 1997.
NOTE B - COMPREHENSIVE INCOME
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS establishes
standards for reporting comprehensive income. Comprehensive income includes net
income and other comprehensive income which is defined as non-owner related
transactions in equity. The following table sets forth (in thousands) the
amounts of other comprehensive income included in equity for the three months
ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
<S> <C> <C>
Net unrealized loss on securities available for sale for the three months $88 $331
</TABLE>
NOTE C - STOCK SPLITS
During April 1998, the Company's Board of Directors approved a four-for-one
stock split which is payable on June 3, 1998 to shareholders of record at the
close of business on May 20, 1998. The Company also had two-for-one stock splits
in May 1997 and February 1998. All share data has been restated as if the May
1997 and February 1998 splits had occurred at the beginning of the years
presented.
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, its third full service branch in April, 1995 and its fourth full
service branch in May, 1997. In August, 1996 the Bank opened an insurance
subsidiary, Franklin Financial Insurance (formerly Hometown Insurance Agency.)
The agency is located in the Bank's Spring Hill facility. In October, 1997 the
Bank opened a financial services subsidiary, Franklin Financial Securities. The
subsidiary offers financial planning and securities broker services through
Invest Financial Corporation of Tampa, Florida. In January, 1998 the Bank began
operating its mortgage division in a separate subsidiary, Franklin Financial
Mortgage. Also in January, 1998, the mortgage subsidiary began a wholesale
mortgage operation located in an office in Bartlett, Tennessee. Franklin
Financial Mortgage originates, sells and services mortgage loans.
FINANCIAL CONDITION
Total assets have grown $31.7 million since December 31, 1997, for a total of
$306.1 million at March 31, 1998. The growth has been mostly funded by a $27.8
and $2.0 million increase in deposits and other borrowings, respectively.
The Bank continues to experience strong loan demand. Net loans have increased
2.7% or $5.0 million since December 31, 1997, to $193.5 million at March 31,
1998. Securities available-for-sale increased $4.6 million or 8.4% while
securities held-to-maturity decreased $437,000 or 7.3% during the three months
ended March 31, 1998. Loans held for resale increased $8.5 million or 228% since
December 31, 1997. This is due to an increase in mortgage loan originations.
Premises and equipment increased by $129,000 since December 31, 1997 primarily
related to additional computer equipment due to overall Bank and employee
growth.
Accrued income receivable increased $116,000 or 6.1% since December 31, 1997.
This increase is due to the combined increase of $17.7 million in loans and
securities since December 31, 1997.
The allowance for loan losses increased $58,000 since December 31, 1997, for a
total of $1,886,000 or approximately .91% of total loans. This increase is
primarily additional provision for loan losses to allow for growth in the loan
portfolio. Net charge-offs were $7,000 during the first three months of 1998.
Asset quality remains good and management believes that the allowance for loan
losses is adequate at March 31, 1998. 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, 1998 and past due loans, at
.33% 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 $19.0 million
at March 31, 1998. Loans and securities scheduled to mature within one year
exceed $124 million at March 31, 1998, which should provide further liquidity.
In addition, approximately $59.7 million of securities are classified as
available-for-sale to help meet liquidity needs should they arise. The Company
has lines of credit of $7.5 million with lending institutions and the Bank is
approved to borrow up to $7.5 million in funds from the Federal Home Loan Bank
and $17.5 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 March 31, 1998. In
February, 1998 the Bank entered into a $3.0 million convertible Federal Home
Loan Bank advance with a 10/1 call option. The Bank has $3.4 million outstanding
in repurchase agreements to further develop it's relationship with a customer.
This is included in other borrowings. The Bank has approximately $43.0 million
in brokered deposits at March 31, 1998 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 $16.0 million in loan commitments are expected to be funded within
the next six months. Furthermore, the Bank has approximately $28.2 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 $500,000 and construction
is scheduled to be completed during the second quarter of 1998. During the
second quarter of 1998, the Bank entered into a lease agreement with Gordon E.
Inman, Chairman of the Company, for a 4,000 square foot building which adjoins
the Bank's main office building property. The annual lease payments on this
facility are approximately $59,000. 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 will house its insurance sales function at this location. The
Bank has been approved to open a full service branch facility in Nolensville,
Tennessee. To date, no land has been acquired on which to locate this facility.
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 $8.3 million during
the three months ended March 31, 1998 as compared to a $1.5 million decrease for
the same period in 1997. Cash provided by operating activities increased
$510,000 during the first three months of 1998, as compared to the same period
in 1997. This increase is due to an increase in net income of $315,000 and by a
$174,000 increase in other liabilities for the three months ended March 31, 1998
as compared to the previous year.
Net cash used by investing activities increased $1.4 million during the first
three months of 1998 compared to the same period in 1997. The net increase in
portfolio loans used $4.5 million less in funds for the three months ended March
31, 1998 as compared to the same period in 1997. Due to the securities
portfolio, investing activities required $3.0 million less use of funds during
the three months March 31, 1998 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 much of the cash flow
requirements with $6.6 million in additional funds used.
7
<PAGE> 8
Cash provided by financing activities increased $10.7 million during the first
three months of 1998 as compared to the same period in 1997. The increase is
attributable to a $13.5 million increase in deposits offset slightly by a $2.9
million decrease in other borrowings during the first three months of 1998 as
compared to the same period in 1997.
Equity capital exceeds regulatory requirements at March 31, 1998, 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% 6.6% 4.0% 9.1% 8.0% 10.1%
Bank 3.0% 7.3% 4.0% 10.1% 8.0% 11.0%
</TABLE>
RESULTS OF OPERATIONS
The Company had net income of $1.2 million in the first quarter of 1998 compared
to net income of $841,000 for the same period in 1997. Net income for the first
quarter ending March 31, 1998 increased $315,000 as compared to the same period
in 1997. Increases in net interest income, mortgage banking fees and other 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 months ended March
31, 1998 as compared to the same period in 1997.
Total interest income increased $1.2 million or 24.1% in the three months ended
March 31, 1998 compared to the same periods in 1997. 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 three months of 1998
compared to 1997. Total interest expense increased $681,000 or 28.9% in the
first quarter of 1998 as compared to the same period in 1997. Total
interest-bearing liabilities have increased 10.4% from December 31, 1997 and
27.3% from March 31, 1997. The increases in deposits and other borrowings are
the primary reasons for the increase in interest expense. Net interest income
increased $514,000 or 19.8% during the first quarter of 1998 as compared to the
prior year. Total earning assets increased 25.7% since March 31, 1997 and was
the primary factor in the increase in net interest margin.
The provision for loan losses was $65,000 for the three months ended March 31,
1998 as compared to $115,000 for the same period in 1997. 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 $988,000 in the first quarter of 1998 is $447,000 or 82.6%
more than the same period in 1997. The increase is primarily attributed to an
increase in mortgage banking fees resulting from an increase in loans
originated. Mortgage banking fees increased $117,000 or 56.3% for the three
months ended March 31, 1998 as compared to the same period in 1997. Other fees
increased $199,000 or 269% for the first three months of 1998 as compared to the
same period in 1997. The increase is primarily the result of an $87,000 increase
in investment portfolio call option fees, a $22,000 increase in insurance
commissions through Franklin Financial Insurance and a $65,000 increase in
income on the sale of financial products through Franklin Financial Securities.
Total other expenses increased $508,000 or 29.8% during the first quarter of
1998 as compared to the same periods in 1997. The increases are attributable to
additional personnel and other incremental costs related to the overall growth
of the Company.
ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information" on January 1, 1998. This accounting pronouncement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports to shareholders. Operating segments are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Adoption of SFAS No. 131 will
expand disclosures related to the consolidated financial statements. The Company
is currently evaluating SFAS No. 131's operations to determine the appropriate
disclosures.
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
------- ----------------------
<S> <C>
27 - Financial Data Schedules
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended March 31, 1998.
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, 1998 By: /s/ Richard E. Herrington
-------------------------
Richard E. Herrington, President and Chief
Executive Officer (principal executive
and financial officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 18,973
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,090
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,701
<INVESTMENTS-CARRYING> 5,523
<INVESTMENTS-MARKET> 5,640
<LOANS> 207,666
<ALLOWANCE> 1,886
<TOTAL-ASSETS> 306,129
<DEPOSITS> 275,374
<SHORT-TERM> 5,711
<LIABILITIES-OTHER> 2,386
<LONG-TERM> 3,748
0
0
<COMMON> 9,872
<OTHER-SE> 9,038
<TOTAL-LIABILITIES-AND-EQUITY> 306,129
<INTEREST-LOAN> 5,138
<INTEREST-INVEST> 996
<INTEREST-OTHER> 19
<INTEREST-TOTAL> 6,153
<INTEREST-DEPOSIT> 2,873
<INTEREST-EXPENSE> 3,039
<INTEREST-INCOME-NET> 3,114
<LOAN-LOSSES> 65
<SECURITIES-GAINS> 78
<EXPENSE-OTHER> 2,212
<INCOME-PRETAX> 1,825
<INCOME-PRE-EXTRAORDINARY> 1,825
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,156
<EPS-PRIMARY> .17
<EPS-DILUTED> .13
<YIELD-ACTUAL> 4.77
<LOANS-NON> 0
<LOANS-PAST> 178
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 84
<ALLOWANCE-OPEN> 1,828
<CHARGE-OFFS> 11
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 1,886
<ALLOWANCE-DOMESTIC> 84
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,802
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<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> 9,631
<OTHER-SE> 4,429
<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> .12
<EPS-DILUTED> .11
<YIELD-ACTUAL> 4.84
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 206
<ALLOWANCE-OPEN> 1,472
<CHARGE-OFFS> 3
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 1,574
<ALLOWANCE-DOMESTIC> 33
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,541
</TABLE>
