<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
Commission File No. 33-27232-A
FRANKLIN FINANCIAL CORPORATION
A Tennessee Corporation
(IRS Employer Identification No. 62-1376024)
230 Public Square
Franklin, Tennessee 37064
(615) 790-2265
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
NONE
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and disclosure will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [X]
Revenues for the fiscal year ended December 31. 1997: $25,295,590
The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (2,690,644 shares) on March 15, 1998 was
approximately $6,834,236. As of such date, no organized trading market
existed for the common stock of the registrant. The aggregate market
value was computed by reference to the book value of the common stock of
the registrant as of December 31, 1997. For the purposes of this
response, officers, directors and holders of 5% or more of the
registrant's common stock are considered the affiliates of the registrant
at that date.
The number of shares outstanding of the registrant's common stock, as
of March 15, 1998: 6,995,562 shares of no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
Transitional Small Business Disclosure Format (check one): Yes ; No X
-- --
<PAGE> 2
PART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Annual Report on Form 10-K contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements generally can be identified by
the use of forward-looking terminology, such as "may," "will," "expect,"
"estimate," "anticipate," believe'" "target," "plan," "project," or "continue"
or the negatives thereof or other variations thereon or similar terminology, and
are made on the basis of management's plans and current analyses of the Company,
its business and the industry as a whole. These forward looking statements are
subject to risk and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. The above factors, in some cases, have affected, and in
the future could affect, the Company's financial performance and could cause
actual results for fiscal 1998 and beyond to differ materially from those
expressed or implied in such forward-looking statements. The Company does not
undertake to publicly update or revise its forward-looking statements even if
experience or future changes make it clear that any projected results expressed
or implied therein will not be realized.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Franklin Financial Corporation (the Company) is a registered bank
holding company under the federal Bank Holding Company Act of 1956, as amended,
and owns 100% of the outstanding capital stock of Franklin National Bank,
Franklin, Tennessee (the "Bank'). The Company was incorporated under the laws of
the State of Tennessee on December 27, 1988, as a mechanism to enhance the
Bank's ability to serve its future customers' requirements for financial
services. The holding company structure provides flexibility for expansion of
the Company's banking business through acquisition of other financial
institutions and provision of additional banking-related services which the
traditional commercial bank may not provide under present laws.
The Bank commenced business operations on December 1, 1989 in a
permanent facility located at 230 Public Square, Franklin, Tennessee 37064. The
approximately 12,000 square foot facility is being leased from Gordon E. Inman,
the Chairman of the Board of the Company. The Bank has four full service
branches: one located in the Williamson Square Shopping Center, which opened in
April 1994; one located in Spring Hill, Tennessee, which opened in January 1995;
one located in Brentwood, Tennessee, which opened in April 1995; and one located
in Fairview, Tennessee, which opened in May 1997. The Bank also leases a 9,000
square foot facility, Franklin Financial Center, from Mr. Inman which houses
it's mortgage banking division and financial services subsidiary.
The Bank is a full service commercial bank, without trust powers.
The Bank offers a full range of interest bearing and non-interest bearing
accounts; including commercial and retail checking accounts, negotiable orders
of withdrawal ("NOW") accounts, money market accounts, individual retirement
accounts, regular interest bearing statement savings accounts, certificates of
deposit, commercial loans, real estate loans, commercial and consumer lines of
credit, letters of credit, mortgage loans, home equity loans and
consumer/installment loans. In addition, the Bank provides such consumer
services as travelers checks, cashiers checks, Mastercard and Visa accounts,
safe deposit boxes, direct deposit services, wire transfer services, cash
management services, debit cards, automatic teller machines, a PC homebanking
product and a 24-hour telephone inquiry system. In August 1996, the Bank opened
an insurance subsidiary, Franklin Financial Insurance (formally Hometown
Insurance Agency). It operates from the Bank's Spring Hill location. The agency
sells property, business and life insurance. 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.
<PAGE> 3
During January 1998, The Company's Board of Directors approved a
two-for-one stock split payable on February 17, 1998 to shareholders of record
at the close of business on February 2, 1998. The consolidated balance sheets
and statements of shareholders' equity have been restated as if the split had
occured on December 31, 1997. All share data has been retroactively restated as
if the split, as well as the two-for-one stock split by the Company in May,
1997, had occurred at the beginning of the years presented.
MARKET AREA AND COMPETITION
The primary service area for the Bank is centered around Franklin,
Tennessee and encompasses Williamson, Maury and Davidson Counties in Tennessee.
There are 43 banking offices within the primary service area of the Bank. Most
of these offices are affiliated with major bank holding companies.
The Bank competes with existing area financial institutions other than
commercial banks and savings and loan associations, including insurance
companies, consumer finance companies, brokerage houses, credit unions and other
business entities which have recently been invading the traditional banking
markets. Due to the rapid growth of the Bank's market area, it is anticipated
that additional competition will continue from new entrants to the market.
-2-
<PAGE> 4
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
The following is a presentation of the average consolidated balance
sheet of the Company for the years ended December 31, 1997, 1996 and 1995. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities:
AVERAGE CONSOLIDATED ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash and due from banks ..................... $ 7,435 $ 5,817 $ 4,452
-------- -------- --------
Interest-earning deposits ................... -- 5 85
Securities .................................. 54,206 38,417 32,313
Federal funds sold and reverse repurchases 3,018 1,608 1,661
Net loans ................................... 178,047 133,309 92,349
-------- -------- --------
Total earning assets ...................... 235,271 173,339 126,408
-------- -------- --------
Other assets ................................ 8,627 6,865 6,210
-------- -------- --------
Total assets ............................ $251,333 $186,021 $137,070
======== ======== ========
</TABLE>
AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Non interest-bearing
deposits ........................ $ 24,360 $ 19,939 $ 14,036
NOW deposits, including MMDA .... 48,411 33,741 21,303
Savings deposits ................ 7,307 7,005 6,504
Time deposits ................... 146,995 111,267 84,077
Repurchase agreements ........... 3,670 -- --
Other borrowings ................ 3,793 1,447 471
Other liabilities ............... 827 463 677
-------- -------- --------
Total liabilities ............. 235,363 173,862 127,068
Stockholders equity ............. 15,970 12,159 10,002
-------- -------- --------
Total liabilities and
stockholders' equity ....... $251,333 $186,021 $137,070
======== ======== ========
</TABLE>
-3-
<PAGE> 5
The following is a presentation of an analysis of the net interest
earnings of the Company for the periods indicated with respect to each major
catagory of interest-earning asset and each major category of interest-earning
liability:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
AVERAGE INTEREST AVERAGE NET
ASSETS AMOUNT EARNED YIELD YIELD
------ -------- ------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities ...................... $ 54,206 3,489 6.44%
Federal funds sold and reverse
repurchases ..................... 3,018 161 5.33
Net loans ...................... 178,047(1) 18,872(2) 10.60
-------- ------- ----- -----
Total earning assets ........ $235,271 $22,522 9.57 4.94%
======== =======
<CAPTION>
LIABILITIES AVERAGE INTEREST AVERAGE
----------- AMOUNT PAID RATE PAID
-------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
NOW deposits, including
MMDA ..................... $ 48,411 $ 1,825 3.77%
Savings deposits .......... 7,307 190 2.60
Other time deposits ....... 146,995 8,390 5.71
Other borrowings .......... 7,463 491 6.58
-------- -------
Total interest-
bearing liabilities ....... $210,176 $10,896 5.18
======== =======
</TABLE>
(1) Includes non-accrual loans of approximately $ 0.
(2) Interest earned on net loans includes $1,782,000 in loan fees
and loan service fees.
-4-
<PAGE> 6
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
AVERAGE INTEREST AVERAGE NET
ASSETS AMOUNT EARNED YIELD YIELD
------ -------- ------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning
deposits ........................ $ 5 $ -- 8.00%
Securities ...................... 38,417 2,512 6.54
Federal funds sold and reverse
repurchases ................... 1,608 85 5.29
Net loans ....................... 133,309(1) 14,113(2) 10.59
-------- -------
Total earning assets ........ $173,339 $16,710 9.64 5.18%
======== =======
<CAPTION>
AVERAGE INTEREST AVERAGE
LIABILITIES AMOUNT PAID RATE PAID
----------- ------ -------- ---------
<S> <C> <C> <C>
NOW deposits, including
MMDA .................. $ 33,741 $1,224 3.63%
Savings deposits .......... 7,005 182 2.60
Other time deposits ....... 111,267 6,247 5.61
Other borrowings .......... 1,447 77 5.32
-------- ------
Total interest-
bearing liabilities .... $153,460 $7,730 5.04
======== ======
</TABLE>
(1) Includes non-accrual loans of approximately $ 0.
(2) Interest earned on net loans includes $1,235,000 in loan fees
and loan service fees.
-5-
<PAGE> 7
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------
AVERAGE INTEREST AVERAGE NET
ASSETS AMOUNT EARNED YIELD YIELD
------ ------ ------ ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning
deposits ................... $ 85 $ 6 7.06%
Securities .................. 32,313 2,097 6.49
Federal funds sold .......... 1,661 101 6.08
Net loans ................... 92,349(1) 9,775(2) 10.58
-------- -------
Total earning assets ..... $126,408 $11,979 9.48 4.71%
======== =======
<CAPTION>
AVERAGE INTEREST AVERAGE
LIABILITIES AMOUNT PAID RATE PAID
----------- ------ ---- ---------
(Dollars in thousands)
NOW deposits. including
MMDA ................... $ 21,303 $ 750 3.52%
Saving deposits .......... 6,504 169 2.59
Other time deposits ...... 84,077 5,074 6.04
Other borrowings ......... 471 30 6.31
-------- ------
Total interest-
bearing liabilities ... $112,355 $6,023 5.36
======== ======
</TABLE>
(1) Includes non-accrual loans of approximately $ 4,000.
(2) Interest earned on net loans includes $ 689,000 in loan fees
and loan service fees.
-6-
<PAGE> 8
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The effect on interest income, interest expense and net interest income
in the periods indicated, of changes in average balance and rate from the
corresponding prior period is shown below. The effect of a change in average
balance has been determined by applying the average rate in the earlier period
to the change in average balance in the later period, as compared with the
earlier period. The effect of change in rate has been determined by applying the
average balance in the earlier period to the change in average rate in the later
period, as compared with the earlier period. Changes resulting from average
balance/rate variances have been determined by applying the change in average
balance to the change in average rate in the later period, as compared with the
earlier period. The balance of the change in interest income or expense and net
interest income has been attributed to a change in average balance/rate.
YEAR ENDED DECEMBER 31, 1997
COMPARED WITH
YEAR ENDED DECEMBER 31, 1996
INCREASE (DECREASE) DUE TO:
<TABLE>
<CAPTION>
RATE/
VOLUME RATE VOLUME TOTAL
------- ----- ----- ------
(In thousands)
<S> <C> <C> <C> <C>
Interest earned on:
Interest-earning deposits $ (1) $ -- $ 1 --
Securities ............. 1,033 (40) (16) 977
Federal funds sold .... 74 1 1 76
Net loans ............. 4,741 14 4 4,759
------- ----- ----- ------
Total interest income .. 5,847 (25) (10) 5,812
------- ----- ----- ------
Interest paid on:
NOW deposits ......... 533 47 21 601
Savings deposits ..... 8 -- -- 8
Time deposits ........ 2,002 107 34 2,143
Other borrowings ....... 320 18 76 414
------- ----- ----- ------
Total interest expense . 2,863 172 131 3,166
------- ----- ----- ------
Change in net
interest income ...... $ 2,984 $(197) $(141) $2,646
======= ===== ===== ======
</TABLE>
-7-
<PAGE> 9
YEAR ENDED DECEMBER 31, 1996
COMPARED WITH
YEAR ENDED DECEMBER 31, 1995
INCREASE (DECREASE) DUE TO:
<TABLE>
<CAPTION>
VOLUME RATE VOLUME TOTAL
------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest earned on:
Interest-earning deposits $ (6) $ 1 $ (1) (6)
Securities .............. 396 16 3 415
Federal funds sold ..... (3) (13) -- (16)
Net loans .............. 4,332 5 1 4,338
------- ----- ----- -------
Total interest income ... 4,719 9 3 4,731
------- ----- ----- -------
Interest paid on:
NOW deposits .......... 438 23 13 474
Savings deposits ...... 12 1 -- 13
Time deposits ......... 1,644 (357) (115) 1,172
Other borrowings ........ 62 (4) (9) 49
------- ----- ----- -------
Total interest expense .. 2,156 (337) (111) 1,708
------- ----- ----- -------
Change in net
interest income ....... $ 2,563 $(328) $(108) $ 3,023
======= ===== ===== =======
</TABLE>
-8-
<PAGE> 10
YEAR ENDED DECEMBER 31, 1995
COMPARED WITH
YEAR ENDED DECEMBER 31, 1994
INCREASE (DECREASE) DUE TO:
<TABLE>
<CAPTION>
RATE/
VOLUME RATE VOLUME TOTAL
------- ---- ------ -------
(In thousands)
<S> <C> <C> <C> <C>
Interest earned on:
Interest-earning deposits $ (1) $ 1 $ -- $ --
Taxable securities ......... 533 124 47 704
Federal funds sold ........ 23 23 13 59
Net loans ................. 2,737 790 367 3,894
------- ---- ----- -------
Total interest income ...... 3,292 938 427 4,657
------- ---- ----- -------
Interest paid on:
NOW deposits ............ 168 77 27 272
Savings deposits ........ (54) 1 -- (53)
Time deposits ........... 1,666 645 469 2,780
Other borrowings ........ (53) 28 (20) (45)
------- ---- ----- -------
Total interest expense .. 1,727 751 476 2,954
------- ---- ----- -------
Change in net
interest income ...... $ 1,565 $187 $ (49) $ 1,703
======= ==== ===== =======
</TABLE>
DEPOSITS
The Bank offers a full range of interest bearing and non-interest
bearing accounts, including commercial and retail checking accounts, negotiable
order of withdrawal ("NOW') accounts, money market accounts, individual
retirement accounts, regular interest bearing statement savings accounts and
certificates of deposit with fixed and variable rates and a range of maturity
date options. The sources of deposits are residents, businesses and employees of
businesses within the Bank's market area, obtained through the personal
solicitation of the Bank's officers and directors, direct mail solicitation and
advertisements published in the local media. The Bank pays competitive interest
rates on time and savings deposits up to the maximum permitted by law or
regulation. In addition, the Bank has implemented a service charge fee schedule
competitive with other financial institutions in the Bank's market area,
covering such matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and the like.
-9-
<PAGE> 11
The following tables present, for the periods indicated, the average
amount of and average rate paid on each of the following deposit categories:
YEAR ENDED
DECEMBER 31, 1997
<TABLE>
<CAPTION>
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
---------------- -------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Non interest-bearing
demand deposits ... $ 24,360 Not Applicable
NOW deposits ....... $ 48,411 3.77%
Savings deposits .. $ 7,307 2.60%
Time deposits ..... $146,995 5.71%
</TABLE>
YEAR ENDED
DECEMBER 31. 1996
<TABLE>
<CAPTION>
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
---------------- -------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Non interest-bearing
demand deposits ... $ 19,939 Not Applicable
NOW deposits ....... $ 33,741 3.63%
Savings deposits .. $ 7,005 2.60%
Time deposits ..... $111,267 5.61%
</TABLE>
YEAR ENDED
DECEMBER 31. 1995
<TABLE>
<CAPTION>
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
- ---------------- -------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Non interest-bearing
demand deposits ... $14,036 Not Applicable
NOW deposits ....... $21,303 3.52%
Savings deposits .. $ 6,504 2.59%
Time deposits ..... $84,077 6.04%
</TABLE>
-10-
<PAGE> 12
The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and respective maturities for the year ended
December 31, 1997:
<TABLE>
<CAPTION>
TIME
CERTIFICATES
OF DEPOSIT
------------
(In thousands)
<S> <C>
3 months or less ........ $32,152
3-6 months .............. 18,804
6-12 months ............. 28,518
over 12 months .......... 7,132
-------
Total ............... $86,606
=======
</TABLE>
LOAN PORTFOLIO
The Bank engages in a full complement of lending activities, including
commercial, consumer/installment and real estate loans.
Commercial lending is directed principally towards businesses whose
demands for funds fall within the Bank's legal lending limits and which are
potential deposit customers of the Bank. This category of loans includes loans
made to individual, partnership or corporate borrowers, and obtained for a
variety of business purposes. Particular emphasis is placed on loans to small
and medium-sized businesses. The Bank's real estate loans consist of residential
and commercial first and second mortgage loans, as well as real estate
construction loans and real estate acquisition and development loans.
The Bank's consumer loans consist primarily of installment loans to
individuals for personal, family and household purposes, including education and
automobile loans to individuals and pre-approved lines of credit.
At December 31, 1997, loans within four broad categories exceeded 10%
of total loans: single family residential real estate loans ($66,730,000 or 34%
of total loans), commercial real estate loans ($30,585,000 or 16% of total
loans), commercial and industrial loans ($38,232,000 or 20% of total loans) and
residential construction loans ($33,708,000 or 17% of total loans). There was
material borrower diversification within both the single family residential real
estate, commercial and commercial real estate loan categories. The vast majority
of these loans are secured by properties located in the primary services area of
the Bank (Williamson County and surrounding counties).
-11-
<PAGE> 13
The following table presents various categories of loans contained in
the Bank's loan portfolio for the periods indicated and the total amount of all
loans for such period:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
TYPE OF LOAN
------------
1997 1996 1995 1994 1993
--------- --------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial
and agricultural ........ $ 43,343 $ 33,198 $ 24,143 $ 16,588 $ 11,841
Real estate-construction .... 33,708 23,307 13,073 9,594 7,863
Real estate-mortgage ...... 98,733 84,101 61,472 39,844 27,480
Consumer loans ............ 15,001 13,230 12,016 8,794 6,854
--------- --------- --------- -------- --------
Total portfolio loans ... 190,785 153,836 110,704 74,820 54,038
Loans held for sale ....... 3,737 3,980 1,423 1,422 702
--------- --------- --------- -------- --------
Total loans ............ 194,522 157,816 112,127 76,242 54,740
Less: deferred loan fees ..... (440) (362) (296) (254) (183)
Allowance for possible
loan losses ........... (1,828) (1,472) (1,062) (762) (585)
--------- --------- --------- -------- --------
Total (net of allowance) ....... $ 192,254 $ 155,982 $ 110,769 $ 75,226 $ 53,972
========= ========= ========= ======== ========
</TABLE>
The following is a presentation of an analysis of maturities of loans as of
December 31, 1997:
<TABLE>
<CAPTION>
DUE IN 1 DUE AFTER 1 TO DUE AFTER
TYPE OF LOAN YEAR OR LESS 5 YEARS 5 YEARS TOTAL
- ------------ ------------ ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural ..................... $ 29,879 $13,326 $ 138 $ 43,343
Real estate-construction .............. 33,402 306 -- 33,708
Real estate-mortgage .................. 45,076 45,041 8,616 98,733
Loans held for sale ................... -- -- 3,737 3,737
Consumer loans ........................ 6,022 8,912 67 15,001
-------- ------- ------- --------
Total................................. $114,379 $67,585 $12,558 $194,522
======== ======= ======= ========
</TABLE>
-12-
<PAGE> 14
The following is a presentation of an analysis of sensitivities of
loans to changes in interest rates as of December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Loans due after 1 year with
predetermined interest rates ........ $64,028
Loans due after 1 year with
floating interest rates ............. $16,115
</TABLE>
The following table presents information regarding nonaccrual, past
due and restructured loans at the dates indicated:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
non-accrual basis:
Number ................ 0 0 0 0 0
Amount ................ $-- $-- $-- $ -- $--
Accruing loans which are
contractually past due
90 days or more as to
principal and interest payments:
Number ................ 0 0 0 1 0
Amount ................ $-- $-- $-- $3,000 $--
Loans defined as "troubled
debt restructurings":
Number ................ 0 0 0 0 0
Amount ................ $-- $-- $-- $ -- $--
</TABLE>
As of December 31, 1997, there are no loans classified by the regulators
as doubtful, substandard or special mention that have not been disclosed in the
above table, which (i) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (ii) represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.
Accrual of interest is discontinued on a loan when management of the Bank
determines upon consideration of economic and business factors affecting
collection efforts that collection of interest is doubtful.
Additional interest income of approximately $0 in 1997, $0 in 1996, $423
in 1995, $21 in 1994 and $640 in 1993 would have been recorded if all loans
accounted for on a non-accrual basis had been current in accordance with their
original terms. No interest income has been recognized during the five year
period ended December 31, 1997, on loans that have been accounted for on a
non-accrual basis.
-13-
<PAGE> 15
Although the Bank does not have any loans classified as non-accrual at
December 31, 1997, management has identified other possible credit problems as
follows (in thousands):
<TABLE>
<S> <C>
Special mention ......... $ 683
Substandard ............. 1,150
Doubtful ................ 42
Loss .................... --
------
Total ................. $1,875
</TABLE>
These loans are performing loans but are classified due to payment
history, decline in the borrowers financial position or decline in collateral
value. Loans categorized as "special mention" are currently protected but are
potentially weak. These loans constitute an undue and unwarranted credit risk
but not to the point of justifying a classification of substandard. Loans
classified as "substandard" are inadequately protected by the current sound
worth and paying capacity of the obligor or the collateral pledged, if any.
Loans so classified must have a well-defined weakness or weakness that
jeopardize the liquidation of the debt. Loans classified as "doubtful" have all
the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. Loans classified as "loss" are considered
uncollectible and of such little value that their continuance as bankable assets
is not warranted. Management has provided specific allocations of the allowance
for possible loan losses of $42,000 relating to such loans. There are no other
loans which are not disclosed above, but where known information about possible
credit problems of borrowers causes management to have doubts as to the ability
of such borrowers to comply with the present loan repayment terms.
-14-
<PAGE> 16
SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of the Bank's loss experience is furnished in the following
table for the periods indicated, as well as a breakdown of the allowance for
possible loan losses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995 1994 1993
------- ------- ------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning
of period ................... $ 1,472 $ 1,062 $ 762 $ 585 $ 392
Charge-offs:
Commercial, financial &
agricultural ............... 36 4 -- 1 14
Consumer loans .............. 40 18 38 7 12
Real estate-mortgage ........ -- -- -- -- --
------- ------- ------- ----- -----
76 22 38 8 26
------- ------- ------- ----- -----
Recoveries:
Commercial, financial &
agricultural ............... 1 -- 4 1 6
Consumer loans .............. 11 12 14 10 --
------- ------- ------- ----- -----
12 12 18 11 6
Net charge-offs ............... (64) (10) (20) 3 (20)
------- ------- ------- ----- -----
Additions charged
to operations ............... 420 420 320 174 213
------- ------- ------- ----- -----
Balance at end of period ...... $ 1,828 $ 1,472 $ 1,062 $ 762 $ 585
======= ======= ======= ===== =====
Ratio of net charge-offs during
the period to average loans
outstanding during the period .04% .01% .02% (.01)% .04%
======= ======= ======= ===== =====
</TABLE>
-15-
<PAGE> 17
The allocation of the allowance for loan losses by loan category at
December 31 of the years indicated is presented below, along with percentage of
loans in each category to total loans:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural ..... $ 489 23.1% $ 272 21.0% $ 189 21.6% $117 21.8% $ 76 21.6%
Real estate -
construction ......... 377 17.3 331 14.8 172 11.6 146 12.6 119 14.4
Real estate-mortgage . 813 51.9 735 55.8 479 56.1 334 54.1 265 51.5
Consumer loans ....... 109 7.7 98 8.4 79 10.7 121 11.5 77 12.5
Unallocated .......... 40 N/A 36 N/A 143 N/A 44 N/A 48 N/A
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Total ................ $1,828 100.0% $1,472 100.0% $1,062 100.0% $762 100.0% $585 100.0%
</TABLE>
LOAN LOSS RESERVE
In considering the adequacy of the Company's allowance for possible
loan losses, management has focused on the fact that as of December 31, 1997,
23% of outstanding loans are in the category of commercial loans. Commercial
loans are generally considered by management as having greater risk than other
categories of loans in the Company's loan portfolio. However, approximately 90%
of these commercial loans at December 31, 1997 were made on a secured basis.
Management believes that the secured condition of the preponderant portion of
its commercial loan portfolio greatly reduces any risk of loss inherently
present in commercial loans.
The Company's consumer loan portfolio is also well secured. At December
31, 1997, the majority of the Company's consumer loans were secured by
collateral primarily consisting of automobiles, boats and other personal
property. Management believes that these loans involve less risk than other
categories of loans.
As of December 31, 1997, real estate mortgage loans constituted 52% of
outstanding loans. Approximately $51,962,000 or 51% of this category represents
first mortgage residential real estate mortgages where the amount of the
original loan generally does not exceed 80% of the appraised value of the
collateral. The remaining portion of this category consists primarily of
commercial real estate loans. Risk of loss for these loans is generally higher
than residential loans. Therefore, management has allocated a significant
portion of the allowance for loan losses to this category.
The Company's Board of Directors monitors the loan portfolio quarterly
to enable it to evaluate the adequacy of the allowance for loan losses. The
loans are rated and the allowance established based on the assigned rating. The
provision for loan losses charged to operating expenses is based on this
established allowance. Factors considered by the Board in rating the loans
include delinquent loans, underlying collateral value, payment history and local
and general economic conditions affecting collectibility.
-16-
<PAGE> 18
INVESTMENTS
As of December 31, 1997, investment securities, including
mortgage-backed securities, comprised approximately 23% of the Bank s assets and
loans comprised approximately 70% of the Bank's assets. The Bank invests
primarily in obligations of the United States or obligations guaranteed as to
principal and interest by the United States, other taxable securities and in
certain obligations of states and municipalities. The majority of the
mortgage-backed securities are instruments of U.S. Government agencies. In
addition, the Bank enters into Federal Funds transactions with its principal
correspondent banks, and acts as a net seller of such funds. The sale of Federal
Funds amounts to a short-term loan from the Bank to another bank. Since the Bank
is now in a taxable position and expects to be in a taxable position in the
future, more tax exempt securities have been purchased.
The following tables present, for the periods indicated, the carrying amount of
the Banks investment securities, including mortgage-backed securities, separated
by those available-for-sale and those held-to-maturity.
<TABLE>
<CAPTION>
December 31,
Investment ------------
Category 1997 1996 1995
- -------- ------- ------- -------
(In thousands)
<S> <C> <C> <C>
Available-for-sale:
-------------------
Obligations of U.S. Treasury
and other U.S. Agencies .. $20,862 $13,384 $12,240
Obligations of States
and Political Subdivisions..... 4,189 4,277 4,561
Mortgage backed securities ....... 29,654 20,042 14,448
Other securities ................. 350 391 896
------- ------- -------
Total .................. $55,055 $38,094 $32,145
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
Investment ------------
Category 1997 1996 1995
- -------- ------ ------ ------
(In thousands)
<S> <C> <C> <C>
Held-to-maturity:
-----------------
Obligations of U.S. Treasury
and other U.S. Agencies .. $2,098 $1,236 $1,040
Obligations of States
and Political Subdivisions 2,974 2,496 2,125
Mortgage backed securities ....... 857 1,432 249
Other securities ................. 30 29 30
------ ------ ------
Total .................. $5,959 $5,193 $3,444
====== ====== ======
</TABLE>
-17-
<PAGE> 19
The following tables indicate for the year ended December 31, 1997,
the amount of investments due in (i) one year or less, (ii) one to five years,
(iii) five to ten years, and (iv) over ten years:
<TABLE>
<CAPTION>
Investment Weighted Average
Category Amount Yield(1)
- -------- ------ --------
(Dollars in thousands)
<S> <C> <C>
Available-for-sale:
- -------------------
Obligations of U.S. Treasury
and other U.S. Agencies:
0 through l Yr .................... $ 3,750 5.83%
Over 1 through 5 Yrs .............. 9,301 5.87
Over 5 through 10 Yrs ............. 6,004 6.26
Over 10 Yrs ....................... 1,366 9.86
Obligations of States and
Political Subdivisions:
0 through 1 Yr .................... 100 6.90
Over 1 through 5 Yrs .............. 568 6.24
Over 5 through 10 Yrs ............. 1,583 7.52
Over 10 Yrs ....................... 1,816 7.33
Other securities:
Over 1 through 5 Yrs .............. 128 9.51
Over 5 through 10 Yrs ............. 202 7.21
Mortgage-backed securities ........ 29,538 7.02
Fair value adjustment ............. 345 N/A
-------
Total available-for-sale ........ $55,055 6.80
=======
</TABLE>
(1) The Company has invested in tax exempt obligations. Yields are presented
based on adjusted cost basis of securities available-for-sale. Yields based on
carrying value would be lower since fair value exceeds adjusted cost. Yields on
tax exempt obligations have been computed on a tax equivalent basis. Income from
tax exempt obligations is exempt from federal income tax only, therefore only
the federal statutory rate of 34% has been used to compute the tax equivalent
yield.
-18-
<PAGE> 20
<TABLE>
<CAPTION>
Investment Weighted Average
Category Amount Yield(1)
- -------- ------ --------
(Dollars in thousands)
<S> <C> <C>
Held-to-maturity:
- -----------------
Obligations of U.S. Treasury
and other U.S. Agencies:
0 through 1 Yr .................... $ 400 5.70%
Over 1 through 5 Yrs .............. 1,362 5.69
Over 5 through 10 Yrs ............. 335 7.32
Obligations of States and
Political Subdivisions:
0 through 1 Yr .................... 50 7.49
Over 1 through 5 Yrs .............. 275 11.60
Over 5 through 10 Yrs ............. 1,860 6.38
Over 10 Yrs ....................... 790 7.12
Other securities:
Over 5 through 10 Yrs ............. 30 8.07
Mortgage-backed securities ........ 857 7.08
------
Total held-to-maturity .......... $5,959 7.05
======
</TABLE>
The Company has invested in tax exempt obligations. Yields on tax exempt
obligations have been computed on a tax equivalent basis. Income from tax exempt
obligations is exempt from federal income tax only, therefore only the federal
statutory rate of 34% has been used to compute the tax equivalent yield.
RETURN ON EQUITY AND ASSETS
Returns on average consolidated assets and average consolidated
equity for the periods indicated are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Return on average assets ..... 1.55% 1.38% .82%
Return on average equity ..... 24.35% 21.10% 11.23%
Average equity to average
assets ratio ................ 6.35% 6.54% 7.30%
Dividend payout ratio ........ -- -- --
</TABLE>
-19-
<PAGE> 21
ASSET/LIABILITY MANAGEMENT
It is the objective of the Bank to manage assets and liabilities to
provide a satisfactory, consistent level of profitability within the framework
of established cash, loan investment, borrowing and capital policies. Certain of
the officers of the Bank are responsible for monitoring policies and procedures
that are designed to ensure acceptable composition of the asset/liability mix,
stability and leverage of all sources of funds while adhering to prudent banking
practices. It is the overall philosophy of management to support asset growth
primarily through growth of core deposits, which include deposits of all
categories made by individuals, partnerships and corporations. Management of the
Bank seeks to invest the largest portion of the Bank's assets in commercial,
consumer and real estate loans.
The Bank's asset/liability mix is monitored on a daily basis with a
monthly report reflecting interest-sensitive assets and interest-sensitive
liabilities being prepared and presented to the Bank's Board of Directors. The
objective of this policy is to control interest-sensitive assets and liabilities
so as to minimize the impact of substantial movements in interest rates on the
Bank's earnings.
CORRESPONDENT BANKING
Correspondent banking involves the providing of services by one bank to
another bank which cannot provide that service for itself from an economic or
practical standpoint. The Bank is required to purchase correspondent services
offered by larger banks, including check collections, purchase of Federal Funds,
security safekeeping, investment services, coin and currency supplies, overline
and liquidity loan participations and sales of loans to or participations with
correspondent banks.
DATA PROCESSING
The Bank has in-house data processing which provides a full range of
data processing services including an automated general ledger, deposit
accounting, commercial, real estate and installment lending data processing and
central information file (`CIF'). The Bank has an ATM processing agreement with
Intercept Systems, Inc.
FACILITIES
The Bank subleases a two-story commercial facility (approximately
12,000 square feet) located in Franklin, Tennessee from the Company, which
houses the Bank's main office. The facility includes a main banking floor with 7
teller stations and 9 offices, and has an ATM (automated teller machine) and 3
drive-in windows. The second floor of the facility consists of the personnel,
the marketing department, the call center, 2 executive offices and the
facilities management office. The Bank also has an off-site ATM.
In January 1997 the Company purchased a 5,000 sq. foot commercial
building located on Highway 96 West at the Williamson Square Shopping Center in
Franklin which it previously leased. The building houses the Banks Williamson
Square branch. The branch banking floor includes 5 teller stations and 5
offices, and has an ATM (automated teller machine) and 4 drive-in windows.
The Bank owns a 2,700 sq. foot building in Spring Hill, Tennessee which
houses the Spring Hill branch which opened in January 1995. The branch includes
3 offices and 3 teller stations, 2 drive-in windows and an ATM.
The Bank leases a 9,300 square foot building on Main Street in Franklin
which houses the Bank's financial services subsidiary, mortgage banking division
and loan operations/administrative functions.
The Bank leases a 2,700 sq. foot building in Brentwood, Tennessee. The
building houses the Bank's Brentwood branch which opened in April 1995. The
branch has 4 offices, 4 teller stations, 4 drive-in windows and an ATM.
-20-
<PAGE> 22
The Bank leases a 7,000 sq. foot facility on Main Street in Franklin
which houses the Bank's data processing, proof, bookkeeping, and accounting
functions.
The Bank is leasing an office suite in Bartlett, Tennessee which houses
a mortgage loan origination office.
The Bank purchased a parcel of land in Fairview, Tennessee in January
1997. The Bank opened its Fairview branch in a mobile unit on this lot in the
second quarter of 1997 and is constructing a permanent facility to be completed
during the second quarter of 1998.
EMPLOYEES
The Company presently employs 134 persons on a full-time basis,
including 37 officers. The Company will hire additional persons as needed,
including additional tellers and financial service representatives.
MONETARY POLICIES
The results of operations of the Bank are affected by credit policies
of monetary authorities, particularly the Federal Reserve Board. The instruments
of monetary policy employed by the Federal Reserve Board include open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, changes in reserve requirements against member bank deposits
and limitations on interest rates which member banks may pay on time and savings
deposits. In view of changing conditions in the national economy and in the
money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or the
business and earnings of the Bank.
SUPERVISION AND REGULATION
The Company and the Bank operate in a highly regulated environment, and
their business activities are governed by statute, regulation and administrative
policies. The business activities of the Company and the Bank are closely
supervised by a number of federal regulatory agencies, including the Federal
Reserve Board, the Comptroller of the Currency ("Comptroller) and the Federal
Deposit Insurance Corporation ("FDIC").
The Company is regulated by the Federal Reserve Board under the federal
Bank Holding Company Act, which requires every bank holding company to obtain
the prior approval of the Federal Reserve Board before acquiring more than 5% of
the voting shares of any bank or all or substantially all of the assets of a
bank, and before merging or consolidating with another bank holding company. The
Federal Reserve Board (pursuant to regulation and published policy statements)
has maintained that a bank holding company must serve as a source of financial
strength to its subsidiary banks. In adhering to the Federal Reserve Board
policy the Company may be required to provide financial support to a subsidiary
bank at a time when, absent such Federal Reserve Board policy, the Company may
not deem it advisable to provide such assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, the restrictions on interstate acquisitions of banks by bank holding
companies were repealed on September 29, 1995, such that the Company and any
other bank holding company located in Tennessee is able to acquire a bank
located in any other state, and a bank holding company located outside Tennessee
can acquire any Tennessee-based bank, in either case subject to certain deposit
percentage and other restrictions. The legislation also provides that, unless an
individual state elects beforehand either (i) to accelerate the effective date
or (ii) to prohibit out-of-state banks from operating interstate branches within
its territory, on or after June 1,1997, adequately capitalized and managed bank
holding companies will be able to consolidate their multistate bank operations
into a single bank subsidiary and to branch interstate through acquisitions. De
novo branching by an out-of-state bank would be permitted only if it is
expressly permitted by the laws of the host state. The authority of a bank to
establish and operate branches within a state will continue to be subject to
applicable state branching laws. Pursuant to the Riegle-Neal Interstate Banking
and Branching Efficiency Act, the State of Tennessee has adopted legislation
that authorizes out-of-state banks to operate interstate branches within its
territory effective June 1, 1997.
-21-
<PAGE> 23
A bank holding company is generally prohibited from acquiring control
of any company which is not a bank and from engaging in any business other than
the business of banking or managing and controlling banks. However, there are
certain activities which have been identified by the Federal Reserve Board to be
so closely related to banking as to be a proper incident thereto and thus
permissible for bank holding companies. Effective April 21, 1997, the Federal
Reserve Board revised and expanded the list of permissible nonbanking
activities, which includes the following activities: extending credit and
servicing loans; acting as investment or financial advisor to subsidiaries and
certain outside companies; leasing personal or real property or acting as a
broker with respect thereto; providing management and employee benefits
consulting advice and career counseling services nonaffiliated banks and nonbank
depository institutions; operating certain nonbank depository institutions;
performing certain trust company functions; providing certain agency
transactional services, including securities brokerage services, riskless
principal transactions, private placement services, and acting as a futures
commission merchant; providing data processing and data transmission services;
acting as an insurance agent or underwriter with respect to limited types of
insurance; performing real estate appraisals; arranging commercial real estate
equity financing; providing check-guaranty, collection agency and credit bureau
services; engaging in asset management, servicing and collection activities;
providing real estate settlement services; acquiring certain debt which is in
default; underwriting and dealing in obligations of the United States, the
states and their political subdivisions; engaging as a principal in foreign
exchange trading and dealing in precious metals; providing other support
services such as courier services and the printing and selling of checks; and
investing in programs designed to promote community welfare.
In determining whether an activity is so closely related to banking as
to be permissible for bank holding companies, the Federal Reserve Board is
required to consider whether the performance of such activities by a bank
holding company or its subsidiaries can reasonably be expected to produce such
benefits to the public as greater convenience, increased competition and gains
in efficiency that outweigh such possible adverse effects as undue concentration
of resources, decreased and unfair competition, conflicts of interest or unsound
banking practices. Generally, bank holding companies are required to obtain
prior approval of the Federal Reserve Board to engage in any new activity not
previously approved by the Federal Reserve Board.
As a national bank, the Bank is subject to the supervision of the
Comptroller and, to a limited extent, the FDIC and the Federal Reserve Board.
With respect to expansion, the Comptroller has approved several applications
submitted by banks in the State of Tennessee, allowing such banks to establish
branch offices outside the territorial limits of the counties in which the
national banks are located. Prior to such ruling, national banks were only
permitted to establish branch offices within the geographical limits of the
county in which their main office is situated (with the exception that (i) a
bank may branch into another county by acquiring the assets and deposits of a
closed state bank in such other county, and (ii) a bank may, in certain
situations, establish and operate as a branch bank any branch office previously
operated by an affiliate). The Comptroller's initial ruling on this matter was
upheld in federal court, as were similar rulings in other states. The Bank is
also subject to the Tennessee banking and usury laws restricting the amount of
interest which it may charge in making loans or other extensions of credit. In
addition, the Bank, as a subsidiary of the Company, is subject to restrictions
under federal law in dealing with the Company and other affiliates, if any.
These restrictions apply to extensions of credit to an affiliate, investments in
the securities of an affiliate and the purchase of assets from an affiliate.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person if the loans and extensions of credit are not fully
secured by collateral having a market value at least equal to their face
amount.. In addition, a national bank may grant loans and extensions of credit
to a single person up to 10% of its unimpaired capital and surplus, provided
that the transactions are fully secured by readily marketable collateral having
a market value determined by reliable and continuously available price
quotations at least equal to the amount of funds outstanding. This 10%
limitation is separate from, and in addition to, the 15% limitation for
unsecured loans. Loans and extensions of credit may exceed the general lending
limit if they qualify under one of several exceptions. Such exceptions include
certain loans or extensions of credit arising from the discount of commercial or
business paper, the purchase of bankers' acceptances, loans secured by documents
of tide, loans secured by U.S. obligations and loans to or guaranteed by the
federal government.
-22-
<PAGE> 24
Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the Comptroller. In 1989,
both the Federal Reserve Board and the Comptroller issued new risk-based capital
guidelines for bank holding companies and banks which make regulatory capital
requirements more sensitive to differences in risk profiles of various banking
organizations. The capital adequacy guidelines issued by the Federal Reserve
Board are applied to bank holding companies on a consolidated basis with the
banks owned by the holding company. The Comptroller's risk capital guidelines
apply directly to national banks regardless of whether they are a subsidiary of
a bank holding company. Both agencies' requirements (which are substantially
similar), provide that banking organizations must have capital equivalent to 8%
of weighted risk assets. The risk weights assigned to assets are based primarily
on credit risks. Depending upon the riskiness of a particular asset, it is
assigned to a risk category.
For example, securities with an unconditional guarantee by the United
States government are assigned to the lowest risk category. A risk weight of 50%
is assigned to loans secured by owner-occupied one to four family residential
mortgages, provided that certain conditions are met. The aggregate amount of
assets assigned to each risk category is multiplied by the risk weight assigned
to that category to determine the weighted values, which are added together to
determine total risk-weighted assets. At December 31, 1997, the Company's
consolidated total risk-based capital and Tier 1 ratios were 9.99% and 9.05%
respectively. Both the Federal Reserve Board and the Comptroller have also
implemented minimum capital leverage ratios to be used in tandem with the
risk-based guidelines in assessing the overall capital adequacy of banks and
bank holding companies. Under these rules, banking institutions are required to
maintain a ratio of 4% "Tier 1" capital to total assets (net of goodwill). Tier
1 capital includes common stockholders equity, noncumulative perpetual preferred
stock and minority interests in the equity accounts of consolidated
subsidiaries.
Both the risk-based capital guidelines and the leverage ratio are
minimum requirements, applicable only to top-rated banking institutions.
Institutions operating at or near these levels are expected to have
well-diversified risk, high asset quality, high liquidity, good earnings and in
general, have to be considered strong banking organizations, rated composite 1
under the CAMEL rating system for banks. Institutions with lower ratings and
institutions with high levels of risk or experiencing or anticipating
significant growth are expected to maintain ratios 100 to 200 basis points above
the stated minimums.
The Comptroller amended the risk-based capital guidelines applicable to
national banks in an effort to clarify certain questions of interpretation and
implementation, specifically with regard to the treatment of originated and
purchased mortgage servicing rights and other intangible assets. The
Comptroller's guidelines provide that intangible assets are generally deducted
from Tier 1 capital in calculating a bank's risk-based capital ratio. However,
certain intangible assets which meet specified criteria ("qualifying
intangibles") such as mortgage servicing rights are retained as a part of Tier 1
capital. The Comptroller currently maintains that only mortgage servicing rights
and purchased credit card relationships meet the criteria to be considered
qualifying intangibles. The Comptroller's guidelines formerly provided that the
amount of such qualifying intangibles that may be included in Tier 1 capital was
strictly limited to a maximum of 25% of total Tier 1 capital. The Comptroller
has amended its guidelines to increase the limitation of such qualifying
intangibles from 25% to 50% of Tier 1 capital and further to permit the
inclusion of purchased credit card relationships as a qualifying intangible
asset.
In addition, the Comptroller has adopted rules which clarify treatment
of asset sales with recourse not reported on a bank's balance sheet. Among
assets affected are mortgages sold with recourse under Fannie Mae, Freddie Mac
and Farmer Mac programs. The rules clarify that even though those transactions
are treated as asset sales for bank Call Report purposes, those assets will
still be subject to a capital charge under the risk-based capital guidelines.
The Comptroller, the Federal Reserve Board and the FDIC recently
adopted final regulations revising their risk-based capital guidelines to
further ensure that the guidelines take adequate account of interest rate risk.
Interest rate risk is the adverse effect that changes in market interest rates
may have on a bank's financial condition and is inherent to the business of
banking. Under the new regulations, when evaluating a bank's capital adequacy,
the agencies' capital standards now explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates.
The exposure of a bank's economic value generally represents the change in the
present value of its assets, less the change in the value of its liabilities,
plus the change in the value of its interest rate off-balance sheet contracts.
Concurrently, the agencies issued a joint policy statement to bankers, effective
June 26, 1996, to provide guidance on sound practices for managing interest rate
risk. In the policy statement, the agencies emphasize the
-23-
<PAGE> 25
necessity of adequate oversight by a bank's Board of Directors and senior
management and of a comprehensive risk management process. The policy statement
also describes the critical factors affecting the agencies' evaluations of a
bank's interest rate risk when making a determination of capital adequacy. The
agencies' risk assessment approach used to evaluate a bank's capital adequacy
for interest rate risk relies on a combination of quantitative and qualitative
factors. Banks that are found to have high levels of exposure and/or weak
management practices will be directed by the agencies to take corrective action.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Act"), enacted on December 19, 1991, provides for a number of reforms relating
to the safety and soundness of the deposit insurance system, supervision of
domestic and foreign depository institutions and improvement of accounting
standards. One aspect of the Act involves the development of a regulatory
monitoring system requiring prompt action on the part of banking regulators with
regard to certain classes of undercapitalized institutions. While the Act does
not change any of the minimum capital requirements, it directs each of the
federal banking agencies to issue regulations putting the monitoring plan into
effect. The Act creates five "capital categories" ("well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized") which are defined in the Act and which will
be used to determine the severity of corrective action the appropriate regulator
may take in the event an institution reaches a given level of
undercapitalization. For example, an institution which becomes
"undercapitalized" must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institution's
compliance. Before a capital restoration plan will be approved, any entity
controlling a bank (i.e.. holding companies) must guarantee compliance with the
plan until the institution has been adequately capitalized for four consecutive
calendar quarters. The liability of the holding company is limited to the lesser
of five percent of the institution's total assets or the amount which is
necessary to bring the institution into compliance with all capital standards.
In addition, "undercapitalized" institutions will be restricted from paying
management fees, dividends and other capital distributions, will be subject to
certain asset growth restrictions and will be required to obtain prior approval
from the appropriate regulator to open new branches or expand into new lines of
business.
As an institution drops to lower capital levels, the extent of action
to be taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.
The Act also provides that banks will have to meet new safety and
soundness standards. In order to comply with the Act, the Federal Reserve Board,
the Comptroller and the FDIC have adopted regulations defining operational and
managerial standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits.
Both the capital standards and the safety and soundness standards which
the Act seeks to implement are designed to bolster and protect the deposit
insurance fund.
-24-
<PAGE> 26
In response to the directive issued under the Act, the regulators have
established regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established under the Act.
The following table reflects the capital thresholds:
<TABLE>
<CAPTION>
Total Risk - Tier 1 Risk - Tier 1
Based Capital Based Capital Leverage
Ratio Ratio Ratio
------------- ------------- --------
<S> <C> <C> <C>
Well capitalized (1) 10% 6% 5%
Adequately capitalized (1) 8% 4% 4%(2)
Undercapitalized (4) < 8% < 4% < 4%(3)
Significantly undercapitalized (4) < 6% < 3% < 3%
Critically undercapitalized - - < 2%(5)
</TABLE>
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) <3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(4) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
(5) Ratio of tangible equity to total assets.
As a national bank, the Bank is subject to examination and review by
the Comptroller. This examination is typically completed on-site at least every
eighteen months and is subject to off-site review as well. The Bank submits to
the Comptroller quarterly reports of condition, as well as such additional
reports as may be required by the national banking laws.
As a bank holding company, the Company is required to file with the
Federal Reserve Board quarterly report of its operations and such additional
information as the Federal Reserve Board may require pursuant to the Act. The
Federal Reserve Board may also make examinations of the Company and each of its
subsidiaries.
The scope of regulation and permissible activities of the Company and
the Bank is subject to change by future federal and state legislation.
ITEM 2. DESCRIPTION OF PROPERTY.
On January 5, 1989, the organizers of the Company entered into an
agreement with Gordon E. Inman, the Chairman of the Board of the Company, to
lease a two-story commercial building to house the Bank's office. Additional
space in this building was leased by the Company from Mr. Inman in May 1991 and
in June 1993. The two floors contain an aggregate of approximately 12,000 square
feet. The building is situated on approximately one-tenth acre located at 230
Public Square, Franklin, Tennessee 37064. On May 1, 1997 the Company amended the
original lease to include a 9,300 square foot building adjacent to the current
facility. The building, Franklin Financial Center, is located at 216 East Main
Street, Franklin, Tennessee 37064. On January 5, 1989, the organizers of the
Company also entered into a ground lease with Mr. Inman for the lease of
approximately .05 acres located adjacent to the proposed bank office. The
Company is using this parcel to accommodate the Banks drive-in teller and bank
window facility. Both leases provide for a term of 20 years, with three
five-year renewal options, with the lease terms commencing on May 15, 1989. The
current monthly rental under these leases total $30,696. The Company is
subleasing the permanent facility and the adjacent parcel to the Bank at a rate
which includes reimbursement to the Company for payment of rent, taxes,
insurance, repairs and maintenance of the properties.
In May 1991, the Bank acquired a 3,000 square foot office building in
Spring Hill, Tennessee from Mr. Inman at a purchase price of $305,000. This
facility houses the Banks Spring Hill branch.
-25-
<PAGE> 27
In November 1993, the Bank entered into a long-term lease from an
unrelated third party for a commercial building in the Williamson Square
Shopping Center on Highway 96E in Franklin, Tennessee. This facility houses the
Bank's Williamson Square branch. In January 1997, the Company purchased this
property for $980,000.
In July 1994, the Bank entered into a long-term lease from an unrelated
third party for a commercial building in Brentwood, Tennessee. This facility
houses the Bank's Brentwood branch, which opened in April 1995.
In December 1993, the Bank entered into a six and one-half year lease
with Mr. Inman for office/warehouse space on Main Street in Franklin, Tennessee.
This lease was amended in January 1996 to include an additional 3,000 square
feet. The lease, as amended, covers approximately 7,000 square feet and,
provides for monthly payments to Mr. Inman of $5,305. The office/warehouse space
houses "back office" functions for the Bank, including data processing, proof
and transit, bookkeeping, and accounting.
In January 1997, the Bank purchased a parcel of land in Fairview,
Tennessee at a purchase price of $140,000. The Bank opened a branch office in a
mobile unit at this site in the second quarter of 1997. The Bank is constructing
a permanent facility at this location scheduled to open the second quarter of
1998.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company or
the Bank is a party or of which any of their properties are subject; nor are
there material proceedings known to the Company to be contemplated by any
governmental authority; nor are there material proceedings known to the Company,
pending or contemplated, in which any director, officer or affiliate or any
principal security holder of the Company, or any associate of any of the
foregoing is a party or has an interest adverse to the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended December 31,
1997 to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
During the period covered by this report and to date, there has been no
established public trading market for the Company's common stock. As of March
15, 1998, the approximate number of holders of record of the Company's common
stock was 532.
To date, the Company has not paid any dividends on its common stock. It
is the policy of the Board of Directors of the Company to reinvest earnings for
such period of time as is necessary to ensure the success of the operations of
the Company and of the Bank. There are no current plans to initiate payment of
cash dividends, and future dividend policy will depend on the Bank's earnings,
capital requirements, financial condition and other factors considered relevant
by the Board of Directors of the Company. The Company's revolving credit
facility restricts the payment of cash dividends if the Bank's leverage ratio is
less than 7%.
The Bank is restricted in its ability to pay dividends under the
national banking laws and by regulations of the Comptroller. Pursuant to 12
U.S.C. ss. 56, a national bank may not pay dividends from its capital. All
dividends must be paid out, of undivided profits, subject to other applicable
provisions of law. Payments of dividends out of undivided profits is further
limited by 12 U.S.C. ss. 60(a), which prohibits a bank from declaring a dividend
on its shares of common stock until its surplus equals its shared capital,
unless there has been transferred to surplus not less than 1/10 of the Banks net
income of the preceding two consecutive half year periods (in the case of an
annual dividend). Pursuant to 12 U.S.C. ss. 60(b), the approval of the
Comptroller is required if the total of all dividends declared by the Bank in
any calendar year exceeds the total of its net income for that year combined
with its retained net income for the preceding two years, less any required
transfers to surplus.
-26-
<PAGE> 28
Recent Sales of Unregistered Securities. In December 1997, the Company
issued an aggregate of 1,090 shares of common stock to the directors of the
Company and the Bank as compensation for their service as directors during 1997.
The issuances of securities described above were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 as transactions by an issuer not involving a public offering. All of the
securities were acquired by the recipients thereof for investment and with no
view toward the resale or distribution thereof. In each instance, the purchaser
had a pre-existing relationship with the Company, the offers and sales were made
without any public solicitation, the certificates bear restrictive legends and
appropriate stop transfer instructions have been or will be given to the
transfer agent. No underwriter was involved in the transactions and no
commissions were paid.
On March 25, 1998, the Company's Board of Directors approved a
two-for-one stock split payable on June 3, 1998 to shareholders of record at
the close of business on May 20, 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Details regarding the Company's financial performance are presented in the
following discussion, which should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains its liquidity through the management of its
assets and liabilities. Liquidity management involves meeting the funds flow
requirements of customers who may withdraw funds on deposit or have need to
obtain funds to meet their credit needs. Banks in general must maintain adequate
cash balances to meet daily cash flow requirements as well as satisfy reserves
required by applicable regulations. The cash balances held are one source of
liquidity. Other sources are provided by the investment portfolio, federal funds
sold, sale of loan participations, loan payments, brokered and public funds
deposits and the Company's ability to borrow funds as well as issue new capital.
The Company has approximately $4.3 million in investment securities and
$114.4 million in loans which mature within the next year. The Bank has $13.5
million in Federal funds lines with its correspondent banks to provide liquidity
when needed. The Company's investment portfolio consists of over $55.0 million
of marketable securities classified as available-for-sale which could be sold if
additional liquidity is needed. The Company has lines of credit of $6.0 million
with a lending institution and the Bank is approved to borrow up to $7.5 million
in funds from the Federal Home Loan Bank to assist with capital and liquidity
needs. The Bank has obtained approximately $31.6 million in brokered deposits at
December 31, 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.
In the second quarter of 1997, the Bank opened a full service branch
facility in Fairview, Tennessee, which is currently operating from a mobile unit
on property owned by the Bank. The Bank is constructing a permenant structure on
this property, which is expected to be completed in May, 1998 at an estimated
cost of $500,000. 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. No other material capital expenditures are anticipated
in 1998.
Management monitors the Company's asset and liability positions in
order to maintain a balance between rate sensitive assets and rate sensitive
liabilities and at the same time maintain sufficient liquid assets to meet
expected liquidity needs. Management believes that the Company's liquidity is
adequate at December 31, 1997. There are no trends, demands, commitments, events
or uncertainties that will result in or are reasonably likely to result in the
Company's liquidity increasing or decreasing in any material way. The Company is
not aware of any current recommendations by the regulatory authorities which if
they were to be implemented would have a material effect on the Company's
liquidity, capital resources, or results of operations.
Net cash flow provided by operating activities was $11.8 million in
1997 compared to $3.8 million in 1996, an increase of $8.0 million. The increase
in cash flow is due to an increase in net income for 1997 of $1.3 million as
compared to the previous year, coupled with increases in non-cash items such as
depreciation and other assets.
-27-
<PAGE> 29
Although substantial cash flow has been required related to loans originated for
resale, proceeds from the sale of such loans has served to fund these cash flow
requirements. In 1997 proceeds from the sale of loans exceeded loans originated
for sale by $7.6 million.
Net cash used in investing activities was $63.7 million in 1997
compared to $ 54.2 million in 1996, representing a $9.5 million or 17% increase.
The increase in the investment portfolio of $17.7 million in 1997, compared to
$8.2 million in the prior year, accounted for $9.5 million of the increase,
offset slightly by a decrease in the change in net loans of $44.2 million in
1997 compared to $46.1 million in 1996. Premises and equipment net purchases
increased approximately $2.2 million in 1997 as compared to $300,000 in 1996.
Net cash provided by financing activities was $54.3 million in 1997
compared to $50.7 million in 1996, a $3.6 million or 7% increase. The increase
is attributed in part, to the Company borrowing $1.2 million on its line of
credit in 1997 as compared to $1.1 million in 1996. The Company utilized these
borrowings to purchase capital stock of the Bank. The Company also borrowed
$800,000 on a separate note to purchase its Williamson Square Branch. During the
first quarter of 1997, the Bank entered into a $4.4 million repurchase agreement
to further develop it's relationship with a customer. These increases are offset
by a smaller increase in deposits of $47.7 million in 1997 compared to $49.5
million in the preceding year.
The following is an analysis of rate sensitive assets and liabilities
as of December 31, 1997:
<TABLE>
<CAPTION>
5 YRS.
0-3 MOS. 3-12 MOS. 1-5 YRS. OR MORE Total
--------- -------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities $ 3,031 8,598 34,726 15,788 62,143
Loans 101,321 28,894 63,362 945 194,522
Federal funds sold -- -- -- -- --
--------- ------- ------ ------ -------
Total rate sensitive assets 104,352 37,492 98,088 16,733 256,665
--------- ------- ------ ------ -------
NOW deposits 24,553 -- -- -- 24,553
Savings deposits 39,557 -- -- -- 39,557
Time deposits 63,370 78,539 13,440 -- 155,349
Repurchase agreements 1,000 -- 3,421 -- 4,421
Other borrowings 3,030 -- -- -- 3,030
--------- ------- ------ ------ -------
Total rate sensitive
liabilities 131,510 78,539 16,861 -- 226,910
--------- ------- ------ ------ -------
Excess (Deficiency) of rate
sensitive assets less rate
sensitive liabilities $ (27,158) (41,047) 81,227 16,733 29,755
========= ======= ====== ====== =======
Excess (Deficiency) as a
percentage of earning assets (10.6)% (16.0)% 31.6% 6.5% 11.5%
Cumulative Excess
(Deficiency) $ (27,158) (68,205) 13,022 29,755 29,755
========= ======= ====== ====== =======
Cumulative Excess
(Deficiency) as a
percentage of earning assets (10.6)% (26.6)% 5.1% 11.5% 11.5%
</TABLE>
-28-
<PAGE> 30
As indicated in the preceding table, the negative gap in the 0-3 month
and 3-12 month categories between rate sensitive assets and rate sensitive
liabilities would allow the Company to reprice its liabilities faster than its
assets in a falling rate environment which should have a positive effect on
earnings. However, in an increasing interest rate environment, the Company may
experience a decrease in earnings. The above table has been prepared based on
principal payment due dates, contractual maturity dates or repricing intervals
on variable rate instruments. With regard to mortgage-backed securities, the
estimated prepayment date is used. Actual payments on mortgage-backed securities
are received monthly and therefore should occur earlier than the contractual
maturity date.
Stockholders' equity at December 31, 1997, was $17.8 million or 6.5% of
total assets compared to $13.5 million at December 31, 1996. The increase
primarily reflects the net income earned during 1997. See note 15 of the Notes
to Consolidated Financial Statements.
<TABLE>
<CAPTION>
MINIMUM
FOR CAPITAL FOR "WELL COMPANY'S
ADEQUACY CAPITALIZED" CONSOLIDATED BANK'S
PURPOSES CATEGORY ACTUAL ACTUAL
------------------------------------------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 6.49% 7.26%
Tier 1 risk-based 4.00% 6.00% 9.05% 10.12%
Total risk-based 8.00% 10.00% 9.99% 11.07%
</TABLE>
FINANCIAL CONDITION
Total assets have grown $58.8 million or 27% since December 31, 1996 to
a total of $274.4 million at December 31, 1997. The growth during 1997 has been
funded by $47.7 million increase in deposits, a $2.0 million increase in other
borrowings, a $4.4 million increase in repurchase agreements, and net income of
$3.9 million. Total deposits were $247.6 million at December 31, 1997.
The Company continues to experience excellent loan demand as
demonstrated by the growth in net loans of $36.5 million or 24% from December
31, 1996. The allowance for loan losses increased $356,000 or 24% from the level
at December 31, 1996, for a total of $1.8 million or approximately 1% of total
loans. The increase is primarily the result of growth in the loan portfolio and
not because of a decline in asset quality. Management believes that the level in
the allowance for loan losses is adequate at December 31, 1997. Management
reviews in detail the level of the allowance for loan losses on a quarterly
basis. In addition, Professional Bank Services, an external bank consulting
firm, performs a annual review of the loan portfolio to provide management an
independent third party opinion regarding the adequacy of the allowance for loan
losses. At December 31, 1997, the Bank had loans that were specifically
classified as impaired in the amount of approximately $29,800. The allowance for
loan losses related to impaired loans amount to $25,000 at December 31, 1997.
Effective December 31, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115 "Accounting for Certain Debt
and Equity Securities" (SFAS 115). In accordance with this statement securities
are classified as held-to-maturity, available-for-sale or trading. At December
31, 1997 and 1996, fair value of the securities classified as available-for-sale
exceeded the adjusted cost of securities by $345,000 and $82,000, respectively,
and as a result stockholders equity reflects an unrealized gain net of taxes of
$214,000 and $51,000, respectively. See notes 1 and 3 to the Consolidated
Financial Statements.
Total securities, including mortgage-backed securities, increased $17.7
million or 41% during 1997. Property and equipment increased $1.6 million during
1997 primarily due to the purchase of the Bank's Williamson Square Branch.
Accrued income receivable increased $341,000 in 1997 due to increases in the
Bank's loan and securities portfolios. Stockholders' equity increased $4.3
million or 32% from December 31, 1996 primarily as a result of earnings of $3.9
million in 1997.
-29-
<PAGE> 31
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED WITH FISCAL 1996
The Company had net income of $3.9 million in 1997 compared to $2.6
million in 1996. The Company had income before taxes of $6.1 million in 1997,
representing a 53% increase over the $4.0 million recorded in 1996.
Total interest income increased $5.8 million or 35% in 1997 as compared
to 1996, while total interest expense increased $3.2 million or 41% in 1997 as
compared to 1996. The increase in total interest income is attributable to an
increase in average earning assets of $61.9 million or 36% in 1997. Average
interest bearing liabilities increased $56.7 million or 37% in 1997. The Bank's
"negative gap" position in the short term (one year or less) and a slightly
higher interest rate environment in 1997 as compared to 1996 resulted in an
decrease in net yield from 5.18% in 1996 to 4.94% in 1997."Negative gap" is used
to describe the interest rate risk position when a Bank's rate sensitive
liabilities are repricing faster than rate sensitive assets.
The provision for loan losses was $420,000 in 1997 and 1996. Provisions
for loan losses have been necessary due to growth in the Bank's loan portfolio.
Net charge-offs were $64,000 or less than .04% of average loans outstanding in
1997.
Total other income of $2.8 million in 1997 increased $973,000 or 54%
from 1996. The increase was attributed to an increase of $195,000 or 22% in
service charges on deposit accounts directly related to the increase in deposit
accounts and an increase of $601,000 or 113% in mortgage banking activities. The
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinquishments of Liabilities," in 1997, which superceeded SFAS No. 122
"Accounting for Mortgage Servicing Rights." Mortgage servicing rights
contributed $239,000 and $106,000 in 1997 and 1996, respectively, to mortgage
banking activities. Other service charges, commissions and fees increased
$144,000 or 52% primarily due to security call option fees of $147,000 in 1997
as compared to $21,000 in 1996.
Total other expenses increased $1.5 million or 23% during 1997 as
compared to 1996. Salaries and employee benefits increased $880,000 or 25%
primarily due to additional personnel. The Bank had 134 full time equivalent
employees at December 31, 1997 as compared to 101 a year earlier. Included in
salaries and employee benefits are commissions related to the mortgage banking
department of $281,000 in 1997 compared to $144,000 in 1996. Occupancy expense
and furniture and equipment expense increased $83,000 or 10% and 120,000 or 22%,
respectively, from 1996 primarily due to the new Fairview branch and Franklin
Financial Center facilities. Other expenses have increased as a result of the
overall growth of the Bank.
FISCAL 1996 COMPARED WITH FISCAL 1995
The Company had net income of $2.6 million in 1996 compared to $1.1
million in 1995. The Company's traditional banking business, which includes all
activities carried on by the Company except mortgage banking, had income before
taxes of $3.9 million in 1996, representing a 129% increase over the $1.7
million recorded in 1995. The Company's mortgage banking business realized
income of $62,000 before taxes in 1996 as compared to a loss of $22,000 before
taxes in 1995.
Total interest income increased $4.7 million or 39% in 1996 as compared
to 1995, while total interest expense increased $1.7 million or 28% in 1996 as
compared to 1995. The increase in total interest income is attributable to an
increase in average earning assets of $46.9 million or 37% in 1996. Average
interest bearing liabilities increased $27.1 million or 21% in 1996. The Bank's
"negative gap" position in the short term (one year or less) and an overall
lower interest rate environment in 1996 as compared to 1995 resulted in an
increase in net yield from 4.71% in 1995 to 5.18% in 1996."Negative gap" is used
to describe the interest rate risk position when a Bank's rate sensitive
liabilities are repricing faster than rate sensitive assets.
-30-
<PAGE> 32
The provision for loan losses was $420,000 in 1996 compared to $320,000
in 1995. Provisions for loan losses have been necessary due to growth in the
Bank's loan portfolio. Net charge-offs were $10,000 or less than .01% of average
loans outstanding in 1996.
Total other income of $1.8 million in 1996 increased $476,000 or 36%
from 1995. The increase was attributed to an increase of $227,000 or 34% in
service charges on deposit accounts directly related to the increase in deposit
accounts and an increase of $48,000 or 10% in mortgage banking activities. The
Company elected early adoption of (SFAS 122) in 1995. This contributed $106,000
and $117,000 to the increase in mortgage banking activities income in 1996 and
1995, respectively. Other service charges, commissions and fees increased
$151,000 or 117% due to gains on the sale of SBA loans of $124,000.
Total other expenses increased $1.1 million or 21% during 1996 as
compared to 1995. Salaries and employee benefits increased $723,000 or 26%
primarily due to additional personnel. The Bank had 101 full time equivalent
employees at December 31, 1996 as compared to 81 a year earlier. Included in
salaries and employee benefits are commissions related to the mortgage banking
department and annuity sales of $146,000 in 1996 compared to $93,000 in 1995.
FDIC and regulatory assessments decreased $97,000 or 59% from 1995 due to the
lower FDIC assessment structure. Other expenses have increased as a result of
the overall growth of the Bank.
YEAR 2000
The Company is currently evaluating its computer systems as well as
those of its data processing vendor to determine whether modifications and
expenditures will be necessary to make its systems as well as those of its
vendor compliant with Year 2000 requirements. These requirements have arisen due
to the widespread use of computer programs that rely on two-digit date codes to
perform computations on decision making functions. Many of these programs will
fail as a result of their inability to properly interpret date codes beginning
January 1, 2000. For example, such programs may misinterpret "00" as the year
1900 rather than 2000. In addition, some equipment, being controlled by
microprocessor chips, may not deal appropriately with the year "00." The Company
believes that its systems are currently year 2000 compliant and does not believe
that material expenditures will be necessary to implement any further
modifications. However, there can be no assurance that all necessary
modifications will be identified and corrected or that unforeseen difficulties
or costs will not arise. In addition, there can be no assurance that the systems
of other companies on which the Company's systems rely will be modified on a
timely basis, or that the failure by another company to properly modify its
systems will not negatively impact the Company's systems or operations.
ACCOUNTING PRONOUNCEMENTS
In June, 1997, SFAS No. 130, Reporting Comprehensive Income, was issued
and will become effective for the Company in fiscal year 1998. Management does
not expect the adoption of this standard to have a material impact on its
financial statements, except to the extent that unrealized gains and losses on
available-for-sale securities are included in comprehensive income.
Also in June, 1997 and February, 1998, the Financial Accounting
Standards Board issued SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information and SFAS No. 132, Employers Disclosures About Pensions
and Other Post Retirement Benefits. These standards will become effective for
the Company in fiscal year 1998. Management does not expect the adoption of
these standards to have a material impact on the financial statements.
-31-
<PAGE> 33
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements are filed with this report:
Independent Auditor's Report-Deloitte & Touche, LLP
Independent Auditor's Report-Heathcott & Mullaly, P.C.
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
-32-
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
Board of Directors
Franklin Financial Corporation and Subsidiary
We have audited the consolidated balance sheet of Franklin Financial Corporation
and Subsidiary as of December 31, 1997, and the related consolidated statements
of income, changes in stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated financial
statements of the Company for the years ended December 31, 1996 and 1995 were
audited by other auditors whose report, dated March 13, 1997, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements present fairly, in all material
respects, the consolidated financial position of Franklin Financial Corporation
and Subsidiary as of December 31, 1997, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche, LLP
Nashville, Tennessee
February 16, 1998
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
Board of Directors
Franklin Financial Corporation
We have audited the consolidated balance sheet of Franklin Financial Corporation
and Subsidiary as of December 31, 1996, and the related consolidated statements
of income, changes in stockholders' equity, and cash flows for each of the two
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Franklin Financial
Corporation and Subsidiary as of December 31, 1996, and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/Heathcott & Mullaly, P.C.
Brentwood, Tennessee
March 13, 1997
<PAGE> 36
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents (Notes 1 and 2) $ 10,696,477 $ 8,271,546
Federal funds sold -- 233,000
Investment securities available-for-sale, at fair
value (Notes 1 and 3) 25,400,895 18,052,348
Mortgage-backed securities available-for-sale, at
fair value (Notes 1 and 3) 29,653,954 20,042,320
Investment securities held-to-maturity, fair value $5,231,690
in 1997 and $3,841,500 in 1996 (Notes 1 and 3) 5,102,525 3,761,639
Mortgage-backed securities held-to-maturity, fair value
$862,890 in 1997 and $1,437,750 in 1996 (Notes 1 and 3) 856,646 1,431,625
Federal Home Loan and Federal Reserve Bank stock 1,129,100 937,700
Loans held for sale (Note 1) 3,736,909 3,979,922
Loans (Notes 1 and 4) 190,344,656 153,474,281
Allowance for loan losses (Notes 1 and 5) (1,827,956) (1,471,904)
------------ ------------
Net loans 188,516,700 152,002,377
Premises and equipment (Notes 1 and 9) 6,305,752 4,682,471
Accrued interest receivable 1,889,626 1,548,864
Other assets (Notes 7 and 13) 1,144,219 723,562
------------ ------------
TOTAL $274,432,803 $215,667,374
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing $ 28,112,630 $ 27,374,940
Interest-bearing 219,459,079 172,535,886
------------ ------------
Total deposits (Note 10) 247,571,709 199,910,826
Repurchase agreements (Note 6) 4,420,936 --
Other borrowings (Note 11) 3,029,541 1,050,000
Accrued interest payable 1,056,858 734,941
Other liabilities 564,087 467,392
------------ ------------
Total liabilities 256,643,131 202,163,159
COMMITTMENTS AND CONTINGENCIES (Notes 8 and 12)
STOCKHOLDERS' EQUITY:
Common stock, no par value - authorized, 10,000,000 shares;
issued 6,990,362 and 1,732,547 shares at December 31,
1997 and 1996, respectively 9,819,631 4,331,368
Additional paid-in capital -- 5,253,987
Unrealized gain on securities available-for-sale,
net of income taxes (Note 1) 213,780 51,070
Retained earnings 7,756,261 3,867,790
------------ ------------
Total stockholders' equity (Note 15) 17,789,672 13,504,215
------------ ------------
TOTAL $274,432,803 $215,667,374
============ ============
</TABLE>
-2-
<PAGE> 37
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $18,871,966 $14,112,610 $ 9,775,019
Taxable securities 3,193,657 2,236,597 1,846,112
Tax-exempt securities 294,770 275,667 250,871
Federal funds sold 160,896 84,539 101,472
Deposits in financial institutions -- 427 6,361
----------- ----------- -----------
Total interest income 22,521,289 16,709,840 11,979,835
INTEREST EXPENSE:
Certificates of deposit over $100,000 4,442,619 2,947,262 2,275,832
Other deposits 5,962,588 4,705,616 3,717,930
Federal Home Loan Bank advances 25,680 9,260 13,908
Other borrowed funds 465,249 68,447 15,821
----------- ----------- -----------
Total interest expense 10,896,136 7,730,585 6,023,491
----------- ----------- -----------
NET INTEREST INCOME 11,625,153 8,979,255 5,956,344
PROVISION FOR LOAN LOSSES (Note 5) 420,000 420,000 320,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,205,153 8,559,255 5,636,344
OTHER INCOME:
Service charges on deposit accounts 1,096,323 901,214 674,059
Mortgage banking activities 1,132,835 531,620 484,448
Gain on sale of investment securities 121,089 88,933 38,602
Other service charges, commissions and fees 424,054 279,769 128,750
----------- ----------- -----------
Total other income 2,774,301 1,801,536 1,325,859
OTHER EXPENSES:
Salaries and employee benefits (Note 16) 4,401,976 3,521,772 2,799,031
Occupancy (Note 12) 901,174 818,550 709,738
Furniture and equipment 673,752 553,734 435,406
Communications and supplies 343,093 290,761 269,515
Advertising and marketing 282,562 224,083 201,282
FDIC and regulatory assessments 90,167 67,387 164,142
Other 1,148,195 882,518 697,669
----------- ----------- -----------
Total other expenses 7,840,919 6,358,805 5,276,783
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 6,138,535 4,001,986 1,685,420
INCOME TAXES (Note 13) 2,250,064 1,436,501 562,154
----------- ----------- -----------
NET INCOME $ 3,888,471 $ 2,565,485 $ 1,123,266
=========== =========== ===========
NET INCOME PER SHARE:
Basic $ 0.56 $ 0.37 $ 0.16
=========== =========== ===========
Diluted $ 0.48 $ 0.34 $ 0.15
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 6,962,518 6,905,156 6,887,060
=========== =========== ===========
Diluted 8,153,207 7,651,081 7,335,298
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 38
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- PAID-IN
SHARES AMOUNT CAPITAL
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 1,721,556 $ 4,303,890 $5,149,009
Issuance of common stock 1,679 4,198 12,980
Change in unrealized loss on available-for-sale securities,
net of income taxes -- -- --
Net income -- -- --
--------- ----------- ----------
BALANCE, DECEMBER 31, 1995 1,723,235 4,308,088 5,161,989
Issuance of common stock 9,312 23,280 91,998
Change in unrealized loss on available-for-sale securities,
net of income taxes -- -- --
Net income -- -- --
--------- ----------- ----------
BALANCE, DECEMBER 31, 1996 1,732,547 4,331,368 5,253,987
Change in par value of common stock from $2.50 to no par -- 5,253,987 (5,253,987)
Two-for-one stock split 1,732,547 -- --
Issuance of common stock 30,087 234,276 --
Change in unrealized gain on available-for-sale securities,
net of income taxes -- -- --
Net income -- -- --
Subsequent two-for-one stock split (Note 19) 3,495,181 -- --
--------- ----------- ----------
BALANCE, DECEMBER 31, 1997 6,990,362 9,819,631 --
========= =========== ==========
<CAPTION>
NET UNREALIZED
GAIN ON RETAINED
SECURITIES EARNINGS TOTAL
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $(279,693) $ 179,039 $ 9,352,245
Issuance of common stock -- -- 17,178
Change in unrealized loss on available-for-sale securities,
net of income taxes 505,292 -- 505,292
Net income -- 1,123,266 1,123,266
--------- ---------- -----------
BALANCE, DECEMBER 31, 1995 225,599 1,302,305 10,997,981
Issuance of common stock -- -- 115,278
Change in unrealized loss on available-for-sale securities,
net of income taxes (174,529) -- (174,529)
Net income -- 2,565,485 2,565,485
--------- ---------- -----------
BALANCE, DECEMBER 31, 1996 51,070 3,867,790 13,504,215
Change in par value of common stock from $2.50 to no par -- -- --
Two-for-one stock split -- -- --
Issuance of common stock -- -- 234,276
Change in unrealized gain on available-for-sale securities,
net of income taxes 162,710 -- 162,710
Net income -- 3,888,471 3,888,471
Subsequent two-for-one stock split (Note 19) -- -- --
--------- ---------- -----------
BALANCE, DECEMBER 31, 1997 $ 213,780 $7,756,261 $17,789,672
========= ========== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 39
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,888,471 $ 2,565,485 $ 1,123,266
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 679,716 537,628 441,299
Provision for loan losses 420,000 420,000 320,000
Deferred income taxes (36,181) (34,548) 38,947
Loans originated for sale (39,056,678) (25,152,056) (20,388,580)
Proceeds from sale of loans 46,632,305 25,755,653 20,387,929
Gain on sale of investment securities (121,089) (88,933) (38,602)
Gain on sale of loans (92,202) (124,390) (6,740)
Gain on sale of fixed assets (234) (1,950) --
Increase in accrued interest receivable (340,762) (237,659) (383,145)
Increase in accrued interest payable 321,917 219,952 261,521
Increase (decrease) in other liabilities 96,695 (12,500) 382,373
Increase in other assets (553,422) (30,258) (279,256)
------------ ------------ ------------
Net cash provided by operating activities 11,838,536 3,816,424 1,859,012
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in federal funds sold 233,000 299,000 (532,000)
Decrease (increase) in interest-bearing deposits
in financial institutions -- 93,237 (93,237)
Proceeds from sales of securities available-for-sale 34,646,948 5,075,657 5,838,387
Proceeds from maturities of securities available-for-sale 8,875,201 16,312,362 5,034,213
Proceeds from maturities of securities held-to-maturity 859,409 1,079,547 1,782,063
Purchases of securities held-to-maturity (1,638,384) (2,832,353) (914,982)
Purchases of securities available-for-sale (60,138,871) (27,559,776) (17,667,045)
Purchases of Federal Home Loan and Federal Reserve Bank stock (191,400) (240,700) (381,900)
Net increase in loans (44,174,735) (46,112,890) (35,855,245)
Purchases of premises and equipment, net (2,180,409) (337,961) (1,280,522)
------------ ------------ ------------
Net cash used in investing activities (63,709,241) (54,223,877) (44,070,268)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 47,660,883 49,542,790 51,410,905
Increase in repurchase agreements 4,420,936 -- --
Increase (decrease) in other borrowings 1,979,541 1,050,000 (4,900,000)
Net proceeds from issuance of common stock 234,276 115,278 17,178
------------ ------------ ------------
Net cash provided by financing activities 54,295,636 50,708,068 46,528,083
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,424,931 300,615 4,316,827
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,271,546 7,970,931 3,654,104
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,696,477 $ 8,271,546 $ 7,970,931
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 2,311,486 $ 1,422,279 $ 307,442
============ ============ ============
Cash paid during the year for interest $ 10,574,219 $ 7,510,633 $ 5,761,970
============ ============ ============
</TABLE>
-5-
<PAGE> 40
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Franklin Financial Corporation (the "Company")
and Subsidiary conform to generally accepted accounting principles and to
general practices within the banking industry. The Company was
incorporated on December 27, 1988 for the purpose of becoming a bank
holding company. The Company's subsidiary bank opened for business on
December 1, 1989.
CONSOLIDATED SUBSIDIARY - The consolidated financial statements include
the accounts of the Company's wholly-owned subsidiary, Franklin National
Bank, Franklin, Tennessee (the "Bank") and its subsidiaries, Hometown Loan
Company, Hometown Insurance Agency, Inc. and Franklin Financial
Securities. Material intercompany transactions and balances have been
eliminated.
NATURE OF OPERATIONS - Substantially all of the assets, liabilities, and
operations presented in the consolidated financial statements are
attributable to Franklin National Bank. The Bank provides a variety of
banking services to individuals and businesses through its branches in
Brentwood, Franklin, Fairview and Spring Hill, Tennessee. Its primary
deposit products are demand deposits, savings deposits, and certificates
of deposits, and its primary lending products are commercial business,
real estate mortgage, and consumer loans.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ form
those estimates.
CASH AND CASH EQUIVALENTS include cash on hand and amounts due from banks.
INVESTMENT AND MORTGAGE-BACKED SECURITIES - Securities are classified into
three categories: held-to-maturity, available-for-sale, and trading.
Securities classified as held-to-maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. The Company has the
positive intent and ability to hold these securities to maturity.
Securities classified as available-for-sale may be sold in response to
changes in interest rates, liquidity needs and for other purposes.
Available-for-sale securities are carried at fair value and include all
debt and equity securities not classified as held-to-maturity or trading.
Trading securities are those held principally for the purpose of selling
in the near future and are carried at fair value. The Company does not
currently maintain a trading portfolio.
Unrealized holding gains and losses for available-for-sale securities are
excluded from earnings and reported, net of any income tax effect, as a
separate component of stockholders' equity. Realized gains and losses for
securities classified as either available-for-sale or held-to-maturity are
reported in earnings based on the adjusted cost of the specific security
sold.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
-6-
<PAGE> 41
LOANS - Loans are stated at the principal amount outstanding. Deferred
loan fees and the allowance for loan losses are recorded as reductions of
loans. Loan origination and commitment fees in excess of certain related
costs are being deferred and amortized as an adjustment of the related
loan's yield over the contractual life of the loan. Interest income on
loans is computed based on the outstanding loan balance.
Loans are generally placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is delinquent for
90 days or more. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss is remote.
Interest payments received on such loans are applied as a reduction of the
loan principal balance. Interest income on other nonaccrual loans is
recognized only to the extent of interest payments received.
The allowance for possible loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. A loan is considered impaired
when management has determined it is probable that all amounts due
according to the contractual terms of the loan agreement will not be
collected. The allowance is increased by a provision for loan losses,
which is charged to expense and reduced by charge-offs, net of recoveries.
FINANCIAL INSTRUMENTS - All derivative financial instruments held or
issued by the Company are held or issued for purposes other than trading.
Interest rate futures contracts are entered into by the Company as hedges
against exposure to interest rate risk and are not for speculation
purposes. Changes in the market value of interest rate futures contracts
are deferred while the contracts are open and subsequently amortized into
interest income or expense over the maturity period of the hedged assets
or liabilities after the contract closes. The maximum term of such
contracts used by the Company is 30 days.
OTHER OFF-BALANCE SHEET INSTRUMENTS. In the ordinary course of business
the Company has entered into off-balance sheet financial instruments
consisting of commitments to extend credit, standby letters of credit, and
mortgage loans sold subject to repurchase provisions. Such financial
instruments are recorded in the consolidated financial statements when
they are funded or related fees are incurred or received.
MORTGAGE BANKING ACTIVITIES - The Company originates and sells residential
mortgage loans. Generally, such loans are sold at origination. Any loans
held for sale are carried at the lower of cost or market value in the
aggregate with respect to the entire portfolio.
Effective January 1, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinquishments of
Liabilities. This statement, which did not have a material effect on the
Company's consolidated financial statements, requires that servicing
assets be measured by allocating the previous carrying amount between the
assets sold and the retained interests based on their relative fair values
at date of transfer. The Company's mortgage servicing rights are related
to in-house origination serviced for others. The initial amount recorded
as mortgage servicing rights is essentially the difference between the
amount that can be realized when loans are sold, servicing released, as
compared to loans sold, servicing retained.
-7-
<PAGE> 42
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. For
purposes of measuring impairment, the rights are stratified based on the
following predominant risk characteristics of the underlying loans: loan
type, interest rate, loan size, origination date, loan term and collateral
location. The amount of impairment recognized, if any, is the amount by
which the capitalized mortgage servicing rights for a stratum exceed their
fair value.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation has been computed
on straight-line and accelerated methods, based on the estimated useful
lives of the respective assets. Leasehold improvements are being amortized
over the lease term on a straight-line basis.
INCOME TAXES - The Company files a consolidated tax return with its
subsidiary. Income taxes are allocated to members of the consolidated
group on a separate return basis. Income taxes have been provided using
the liability method as prescribed by SFAS No. 109, Accounting for Income
Taxes.
EARNINGS PER SHARE - Earnings per share ("EPS") for all periods have been
computed in accordance with SFAS No. 128, Earnings Per Share. Basic
earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the year.
Diluted earnings per common share is computed by dividing net income by
the weighted-average number of common shares outstanding during the year
plus additional common shares calculated for stock options and warrants
using the treasury stock method.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, SFAS No. 130,
Reporting Comprehensive Income, was issued and will become effective for
the Company in fiscal year 1998. Management does not expect the adoption
of this standard to have a material impact on its consolidated financial
statements, except to the extent that unrealized gains and losses on
available-for-sale securities are included in comprehensive income.
Also in June 1997 and February 1998, the Financial Accounting Standards
Board issued SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information and SFAS No. 132, Employers Disclosures About Pensions
and Other Postretirement Benefits. These standards will become effective
for the Company in fiscal year 1998. Management does not expect the
adoption of these standards to have a material impact on the consolidated
financial statements.
2. RESTRICTED CASH BALANCES
The subsidiary Bank is required to maintain reserves, in the form of cash
and deposits, with the Federal Reserve Bank against its deposit
liabilities. Aggregate reserves of the subsidiary of approximately
$1,096,000 were maintained to satisfy federal regulatory requirements at
December 31, 1997.
-8-
<PAGE> 43
3. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following tables reflect the amortized cost and estimated fair values
of debt, equity and mortgage-backed securities held at December 31, 1997
and 1996. In addition, gross unrealized gains and losses are disclosed as
of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury obligations $13,679,288 $ 60,974 $ (587) $13,739,675
Obligations of U.S. government agencies 7,094,010 38,726 (10,851) 7,121,885
Obligations of state and political subdivisions 4,068,251 124,613 (3,816) 4,189,048
Corporate notes 330,237 20,050 -- 350,287
----------- -------- -------- -----------
Investment securities 25,171,786 244,363 (15,254) 25,400,895
Mortgage-backed securities 29,538,260 182,313 (66,619) 29,653,954
----------- -------- -------- -----------
TOTAL AVAILABLE-FOR-SALE $54,710,046 $426,676 $(81,873) $55,054,849
=========== ======== ======== ===========
HELD-TO-MATURITY
U.S. Treasury obligations $ 507,307 $ -- $ (7) 507,300
Obligations of U.S. government agencies 1,590,710 13,603 -- 1,604,313
Obligations of state and political subdivisions 2,974,508 113,084 -- 3,087,592
Corporate notes 30,000 2,485 -- 32,485
----------- -------- -------- -----------
Investment securities 5,102,525 129,172 (7) 5,231,690
Mortgage-backed securities 856,646 8,499 (2,255) 862,890
----------- -------- -------- -----------
TOTAL HELD-TO-MATURITY $ 5,959,171 $137,671 $ (2,262) $ 6,094,580
=========== ======== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 8,872,291 $ 15,682 $ (6,068) $ 8,881,905
Obligations of U.S. government agencies 4,503,597 35,649 (37,324) 4,501,922
Obligations of state and political subdivisions 4,161,043 143,671 (27,537) 4,277,177
Corporate notes 376,301 15,043 -- 391,344
----------- -------- --------- -----------
Investment securities 17,913,232 210,045 (70,929) 18,052,348
Mortgage-backed securities 20,099,064 119,772 (176,516) 20,042,320
----------- -------- --------- -----------
TOTAL AVAILABLE-FOR-SALE $38,012,296 $329,817 $(247,445) $38,094,668
=========== ======== ========= ===========
HELD-TO-MATURITY
Obligations of U.S. government agencies $ 1,236,133 $ 12,850 $ (426) $ 1,248,557
Obligations of state and political subdivisions 2,495,717 88,875 (21,519) 2,563,073
Corporate notes 29,789 81 -- 29,870
----------- -------- --------- -----------
Investment securities 3,761,639 101,806 (21,945) 3,841,500
Mortgage-backed securities 1,431,625 7,096 (971) 1,437,750
----------- -------- --------- -----------
TOTAL HELD-TO-MATURITY $ 5,193,264 $108,902 $ (22,916) $ 5,279,250
=========== ======== ========= ===========
</TABLE>
Proceeds from sale of securities available-for-sale during 1997, 1996 and
1995 amounted to $34,646,948, $5,075,657 and $5,838,387, respectively.
Gross gains of $148,280, $90,077 and $48,008 and gross losses of $27,191,
$1,144 and $9,406 were realized on those sales in 1997, 1996 and 1995,
respectively.
-9-
<PAGE> 44
The amortized cost and fair value of debt securities at December 31, 1997,
by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------------- -------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 3,850,116 $ 3,852,215 $ 450,656 $ 450,884
Due after one through five years 10,349,450 10,397,767 1,636,989 1,661,681
Due after five through ten years 7,789,404 7,913,210 2,224,911 2,306,464
Due after ten years 3,182,816 3,237,703 789,969 812,661
----------- ----------- ---------- ----------
25,171,786 25,400,895 5,102,525 5,231,690
Mortgage-backed securities 29,538,260 29,653,954 856,646 862,890
----------- ----------- ---------- ----------
$54,710,046 $55,054,849 $5,959,171 $6,094,580
=========== =========== ========== ==========
</TABLE>
Fair value of securities is established by an independent pricing service
as of the approximate dates indicated. Securities carried at $51,283,039
and $41,241,100 at December 31, 1997 and 1996, respectively, were pledged
to secure deposits and for other purposes.
At December 31, 1997, the Company did not hold investment securities of
any single issuer, other than obligations of the U.S. Treasury and other
U.S. government agencies, whose aggregate book value exceeded ten percent
of stockholders' equity.
4. LOANS
Loans at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Commercial, financial and agricultural $ 43,343,432 $ 33,197,608
Real estate - construction 33,708,093 23,307,147
Real estate - mortgage 98,732,668 84,101,030
Consumer 15,000,838 13,230,250
------------ ------------
190,785,031 153,836,035
Deferred loan fees (440,375) (361,754)
------------ ------------
Total loans $190,344,656 $153,474,281
============ ============
</TABLE>
Direct and indirect loans to officers and directors during 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance at beginning of year $ 1,496,491 $ 1,476,767
New loan disbursements 1,255,483 1,012,936
Repayments (1,130,709) (993,212)
----------- -----------
Balance at end of year $ 1,621,265 $ 1,496,491
=========== ===========
</TABLE>
In addition, there were approximately $418,518 of undisbursed loan
commitments to such parties at December 31, 1997.
-10-
<PAGE> 45
5. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $1,471,904 $1,061,609 $ 762,177
Provisions charged to operating expense 420,000 420,000 320,000
Loans charged off (76,419) (22,167) (38,256)
Recoveries on previously charged off loans 12,471 12,462 17,688
---------- ---------- ----------
Balance at end of year $1,827,956 $1,471,904 $1,061,609
========== ========== ==========
</TABLE>
At December 31, 1997, the Bank had loans that were specifically classified
as impaired in the amount of approximately $29,800. The allowance for loan
losses related to impaired loans amount to $25,000 at December 31, 1997.
At December 31, 1996, there were no loans classified as impaired.
6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are treated as
collateralized financing transactions and are recorded at the amounts at
which the securities will subsequently be repurchased. It is the Company's
policy to maintain collateral with a market value equal to or in excess of
the principal amount borrowed under repurchase agreements. The Company
monitors the market value of the underlying securities which collateralize
the related liability on repurchase agreements, including accrued
interest, and provides additional collateral when deemed appropriate.
7. LOAN SERVICING
The unpaid principal balances of mortgage loans serviced for others was
approximately $32,836,000 and $16,964,000 at December 31, 1997 and 1996,
respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $611,000
and $244,000 at December 31, 1997 and 1996, respectively.
As discussed in Note 1, the Company adopted SFAS No. 125 in 1997. Mortgage
servicing rights of $238,622 and $106,289 were capitalized in 1997 and
1996, respectively. Amortization of servicing rights amount to $69,224,
$42,914 and $17,166 during 1997, 1996 and 1995, respectively. At December
31, 1997 and 1996, the amortized costs approximate market value of
mortgage servicing rights.
8. OTHER FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuation in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, mortgage loans sold subject to repurchase provisions
and futures contracts. Those instruments involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank
has in those particular financial instruments.
-11-
<PAGE> 46
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and loans sold subject to certain repurchase
provisions is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
For futures contracts, the contract or notional amounts do not represent
exposure to credit loss. The Company controls the risk of its futures
contracts through credit approvals, limits, and monitoring procedures.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
<S> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $43,732,283
Credit card commitments 232,391
Standby letters of credit 6,263,916
Mortgage loans sold subject to repurchase provisions 10,123,679
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
will expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness individually. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
In connection with its mortgage banking activities, the Bank may be
required to repurchase certain loans sold in the event of non-performance
by the borrower during the initial life of the loan. This period is
normally no longer than 90 days.
Futures contracts are contracts for delayed delivery of securities or
money-market instruments in which the seller agrees to make delivery at a
specified future date of a specified instrument at a specified price or
yield. Risks arise from the possible inability of counterparties to meet
the terms of their contracts and from movements in securities values and
interest rates.
The Bank uses financial futures contracts in connection with its
asset/liability management program in managing interest rate exposure
arising out of non-trading assets and liabilities. Short futures positions
held in U.S. Treasury note contracts at December 31, 1997 and 1996, were
approximately $10,000,000 and $2,000,000, respectively. Deferred gains
primarily representing premiums received of $26,000 and $3,000 at December
31, 1997 and 1996, respectively, are included in other liabilities on the
consolidated balance sheets.
The Bank primarily serves customers located in the Tennessee counties of
Williamson, Maury and Davidson. As such, the Bank's loans, commitments and
stand-by letters of credit have been granted to customers in that area.
Concentration of credit by type of loan is presented in Note 4.
-12-
<PAGE> 47
In the normal course of business, the Bank is involved in various legal
proceedings. Management has concluded, based upon advice of counsel, that
the result of these proceedings will not have a material effect on the
Company's financial condition or results of operations.
9. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 429,227 $ 288,484
Buildings 1,635,562 490,836
Leasehold improvements - buildings 3,454,914 2,941,628
Furniture and equipment 2,859,749 2,478,248
---------- ----------
8,379,452 6,199,196
Less accumulated depreciation and amortization 2,073,700 1,516,725
---------- ----------
$6,305,752 $4,682,471
========== ==========
</TABLE>
10. DEPOSITS
A summary of deposits at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Non-interest bearing demand $ 28,112,630 $ 27,374,940
Interest-bearing demand 56,059,953 38,833,039
Savings 8,050,119 6,850,965
Certificates of deposit of $100,000 or more 86,605,572 66,248,032
Other time 68,743,435 60,603,850
------------ ------------
$247,571,709 $199,910,826
============ ============
</TABLE>
At December 31, 1997, the scheduled maturities of certificates of deposits
and other time deposits are as follows:
<TABLE>
<S> <C>
1998 $141,725,866
1999 9,340,390
2000 1,914,856
2001 485,038
Thereafter 1,882,857
------------
$155,349,007
============
</TABLE>
11. OTHER BORROWINGS
The Company has a $6,000,000 line of credit established with a lending
institution secured by all of the outstanding capital stock of the Bank.
The balance outstanding on the line at December 31, 1997 was $2,280,000.
Interest floats at the lending bank's base rate and is payable quarterly.
Principal payments are required annually on January 31 based on the
outstanding principal balance. The Bank also has
-13-
<PAGE> 48
federal funds lines (or the equivalent thereof) with correspondent banks
totaling approximately $13,500,000.
During 1997, the Company entered into a note payable with a lending
institution in the amount of $753,639. The note bears interest at 8.5% and
is secured by its Williamson Square branch building. Principal and
interest is payable monthly. The amount outstanding at December 31, 1997
is $749,541.
The Bank has a $7,500,000 line of credit with the Federal Home Loan Bank
(FHLB) secured by a blanket pledge of 1-4 family residential mortgage
loans. The arrangement is structured so that the carrying value of the
loans pledged amounts to 150% of the principal balance of advances from
the FHLB. All outstanding advances were paid in full as of December 31,
1997.
12. RELATED PARTY AND OTHER LEASES
The Company has entered into agreements with the chairman of the board of
the Company to lease certain banking facilities. Increases are made
annually on property leased from the chairman based on the increase in the
Consumer Price Index during the previous year. All but one of the leases
provide for a term of twenty years with three, five year renewal options.
The remaining lease provides for a term of six and one half years with
four, five year renewal options. All leases are accounted for as operating
leases. Net rent expense paid to the chairman amounted to $390,206 in
1997, $300,028 in 1996, and $258,855 in 1995. Rent expense paid to
unrelated parties amounted to $148,806 in 1997, $244,041 in 1996, and
$191,514 in 1995.
Minimum lease payments, exclusive of any increases related to the Consumer
Price Index, are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHERS TOTAL
<S> <C> <C> <C>
1998 $ 438,806 $187,224 $ 626,030
1999 438,806 149,057 587,863
2000 406,975 135,378 542,353
2001 375,145 122,602 497,747
2002 375,145 88,200 463,345
Future years 2,422,810 198,450 2,621,260
---------- -------- ----------
Total lease commitments $4,457,687 $880,911 $5,338,598
========== ======== ==========
</TABLE>
-14-
<PAGE> 49
13. INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $1,911,915 $1,222,898 $426,128
State 374,330 248,151 97,079
---------- ---------- --------
Total current expense 2,286,245 1,471,049 523,207
Deferred:
Federal (30,754) (27,239) 32,736
State (5,427) (7,309) 6,211
---------- ---------- --------
Total deferred (benefit) expense (36,181) (34,548) 38,947
---------- ---------- --------
Total income taxes $2,250,064 $1,436,501 $562,154
========== ========== ========
</TABLE>
Net deferred income tax assets are included in other assets on the balance
sheet. Significant temporary differences between tax and financial
reporting that give rise to net deferred tax assets (liabilities) are as
follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 661,174 $ 468,515
Other -- 3,860
--------- ---------
Total deferred tax assets 661,174 472,375
Deferred tax liabilities:
Mortgage servicing rights (133,106) (62,079)
Accumulated depreciation (253,841) (195,402)
FHLB stock dividends (58,288) (35,136)
Unrealized gain on securities available-for-sale (132,525) (31,301)
--------- ---------
Total deferred tax liabilities (577,760) (323,918)
--------- ---------
Net deferred tax asset $ 83,414 $ 148,457
========= =========
</TABLE>
A reconciliation of income taxes with the amount of income taxes computed
by applying the federal statutory rate (34%) to pretax income follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Tax expense at statutory rate $2,087,102 $1,360,675 $ 573,042
Increase (decrease) in taxes resulting from:
Tax-exempt income (100,222) (93,727) (85,296)
State income taxes, net of federal tax benefit 247,058 158,956 68,171
Disallowed interest expense 13,538 13,899 --
Other, net 2,588 (3,302) 6,237
---------- ---------- ---------
Total income taxes $2,250,064 $1,436,501 $ 562,154
========== ========== =========
</TABLE>
-15-
<PAGE> 50
14. STOCK BASED COMPENSATION PLANS
Organizers of the Company received warrants in connection with the
Company's initial public offering granting the holders thereof the option
to purchase 588,576 shares of common stock at $1.25 per share. In
addition, the Company has an Incentive Stock Option Plan (the "Plan")
which was adopted on April 19, 1990, by the Company's shareholders
authorizing up to 200,000 shares for employees who are contributing
significantly to the management or operation of the business of the
Company as determined by the Company's Board of Directors or the committee
administering the Plan. The Plan provides for the grant of options at the
discretion of the Board of Directors of the Company or a committee
designated by the Board of Directors to administer the Plan. The option
exercise price must be at least 100% (110% in the case of a holder of 10%
or more of the common stock) of the fair market value of the stock on the
date the option is granted and the options are exercisable by the holder
thereof in full at any time prior to their expiration in accordance with
the terms of the Plan. Stock options granted pursuant to the Plan will
expire on or before (1) the date which is the tenth anniversary of the
date of the option is granted, or (2) the date which is the fifth
anniversary of the date the option is granted in the event that the option
is granted to a key employee who owns more than 10% of the total combined
voting power of all classes of stock of the Company. In 1996, an amendment
to the plan increased the number of shares available for grant to 750,000
shares and provided for the granting of non-qualified options to eligible
employees. The Plan provides for stock splits declared which would adjust
the options outstanding and the number of shares authorized by the Plan
according to the terms of the stock split. As more fully discussed in
Notes 15 and 19, the Company declared a two-for-one stock split in 1997
and another two-for-one stock split in January 1998. Based on these stock
splits, the number of shares authorized under the Plan is 3,000,000.
All options expire within ten years from the date of grant except for
30,000 options issued in 1995 which expire in five years and 226,000
options issued in 1997 which expire in 15 years. The Company has continued
to apply APB Opinion No. 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for
either plan. Had compensation cost for the plans been determined based on
the fair value at the grant date for awards under those plans consistent
with the method of SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income
As reported $3,888,471 $2,565,485 $1,123,266
Pro forma 2,922,662 2,068,800 1,073,851
Net income per share
As reported:
Basic $ 0.56 $ 0.37 $ 0.16
Diluted 0.48 0.34 0.15
Proforma:
Basic 0.45 0.30 0.16
Diluted 0.39 0.27 0.15
</TABLE>
In calculating the pro forma disclosures, the fair value of the options
granted is estimated as of the date granted using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Dividend yield N/A 1% N/A
Expected volatility 29% 28% 26%
Risk-free interest rate range 5.8% to 6.5% 6.50% 6.50%
Expected life 7 years 9 years 7 years
</TABLE>
-16-
<PAGE> 51
A summary of the status of the Company's stock option plans and warrants
for the three years ended December 31, 1997, and the changes during those
years is presented below.
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS/ AVERAGE
WARRANTS EXERCISE
OUTSTANDING PRICE
<S> <C> <C>
Options and warrants outstanding at December 31, 1994 850,616 1.42
Options granted 52,000 2.55
Options exercised (1,828) 1.38
Options expired (1,044) 1.38
---------
Options and warrants outstanding at December 31, 1995 899,744 1.70
Options granted 473,560 3.10
Options exercised (29,852) 2.75
---------
Options and warrants outstanding at December 31, 1996 1,343,452 2.53
Options granted 507,700 4.67
Options exercised (56,100) 3.36
Options expired (856) 1.38
---------
Options and warrants outstanding at December 31, 1997 1,794,196 2.69
=========
</TABLE>
The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1997, 1996 and 1995 is
$2.35, $1.32 and $.95 per share, respectively.
The following table summarizes information about the stock options and
warrants outstanding under the Company's plans at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE REMAINING NUMBER
PRICE OUTSTANDING PRICE LIFE EXERCISABLE
<S> <C> <C> <C> <C>
$1.25 - $2.50 865,336 $ 1.38 2.89 865,336
$2.51 - $4.50 914,660 $ 3.81 9.98 914,660
$4.51 - $11.00 14,200 $10.75 9.96 14,200
--------- ---------
1,794,196 $ 2.69 6.56 1,794,196
========= =========
</TABLE>
15. CAPITAL
During 1997, the shareholders approved a change in the Company's par value
of common stock from $2.50 to no par. The change in par value did not
affect any of the existing rights of shareholders and has been recorded as
adjustments to additional paid in capital and common stock.
Substantial restrictions are placed on the Company's subsidiary with
respect to payment of dividends without prior regulatory approval. The
extent of dividends which may be paid by a national bank is generally
limited to net profits for any given year combined with the retained net
profits of the two preceding years. Cash dividends are also restricted,
under the credit arrangement, if the Bank's leverage capital ratio is less
than 7%.
-17-
<PAGE> 52
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, specific capital guidelines must
be met that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require that the Company and the Bank maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to total average assets (as defined). Management
believes, as of December 31, 1997 and 1996, that the Company and the Bank
are in compliance with all capital adequacy requirements to which they are
subject.
As of December 31, 1997, the most recent notification from the regulatory
agencies categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios must be maintained as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
Actual capital amounts and ratios at December 31, 1997 and 1996, are as
follows:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ADEQUACY PURPOSES ACTION PROVISIONS ACTUAL
---------------------------- ------------------------ ----------------------------
DECEMBER 31, 1997 FRANKLIN FRANKLIN FRANKLIN
NATIONAL NATIONAL NATIONAL
BANK CONSOLIDATED BANK CONSOLIDATED BANK CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C>
Amount:
Tier I to average
assets $10,766,274 $10,805,361 $13,457,843 N/A $19,537,987 $17,542,616
Tier I to risk-
weighted assets 7,718,760 7,757,600 11,578,140 N/A 19,537,987 17,542,616
Total capital to risk-
weighted assets 15,437,520 15,515,200 19,296,900 N/A 21,365,943 19,370,572
Ratios:
Tier I to average
assets 4.00% 4.00% 5.00% N/A 7.26% 6.49%
Tier I to risk-
weighted assets 4.00% 4.00% 6.00% N/A 10.12% 9.05%
Total capital to risk-
weighted assets 8.00% 8.00% 10.00% N/A 11.07% 9.99%
</TABLE>
-18-
<PAGE> 53
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ADEQUACY PURPOSES ACTION PROVISIONS ACTUAL
---------------------------- ------------------------- -----------------------------
DECEMBER 31, 1996 FRANKLIN FRANKLIN FRANKLIN
NATIONAL NATIONAL NATIONAL
BANK CONSOLIDATED BANK CONSOLIDATED BANK CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C>
Amount:
Tier I to average
assets $ 7,440,200 $ 7,440,840 $ 9,300,250 N/A $14,435,991 $13,453,145
Tier I to risk-
weighted assets
6,358,360 6,359,680 9,537,540 N/A 14,435,991 13,453,145
Total capital to risk-
weighted assets
12,716,720 12,719,360 15,895,900 N/A 15,907,895 14,925,049
Ratios:
Tier I to average
assets 4.00% 4.00% 5.00% N/A 6.69% 6.24%
Tier I to risk-
weighted assets 4.00% 4.00% 6.00% N/A 9.08% 8.46%
Total capital to risk-
weighted assets 8.00% 8.00% 10.00% N/A 10.01% 9.39%
</TABLE>
In the calculation of basic and diluted EPS, net income is identical.
Below is a reconciliation for the three years in the period ended December
31, 1997, of the difference between basic weighted average common shares
outstanding and diluted weighted average common shares outstanding.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Weighted average common shares - basic 6,962,518 6,905,156 6,887,060
Effect of dilutive securities:
Stock options 693,963 174,001 122,419
Warrants 496,726 571,924 325,819
--------- --------- ---------
Weighted average common shares - diluted 8,153,207 7,651,081 7,335,298
========= ========= =========
</TABLE>
During March 1997, the Company declared a two-for-one common stock split
which was payable on May 21, 1997, to shareholders of record on May 1,
1997. All references to per share and weighted average share information
in the consolidated financial statements have been adjusted to reflect the
stock split on a retroactive basis.
16. EMPLOYEE BENEFITS
The Company has a 401(k) savings plan for all employees who have completed
ninety days of service and are eighteen years of age or more. The Company
generally matches fifty percent of employee contributions to the plan up
to a maximum of three percent of gross wages. The Company's contributions
to the plan are included in salaries and employee benefits on the
consolidated statements of income and amounted to $56,815, $45,249 and
$33,379, in 1997, 1996 and 1995, respectively.
-19-
<PAGE> 54
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 10,696,477 $ 10,696,477 $ 8,271,546 $ 8,271,546
Federal funds sold -- -- 233,000 233,000
Securities available-for-sale 55,054,849 55,054,849 38,094,668 38,094,668
Securities held-to-maturity 5,959,171 6,094,580 5,193,264 5,279,250
Federal Home Loan and Federal
Reserve Bank Stock 1,129,100 1,129,100 937,700 937,700
Loans 194,081,565 193,004,781 157,454,203 156,015,276
Mortgage servicing rights 332,765 332,765 163,367 163,367
Accrued interest receivable 1,889,626 1,889,626 1,548,864 1,548,864
Financial liabilities:
Deposits with defined maturities 155,349,007 155,273,202 126,851,882 126,853,049
Deposits with undefined maturities 92,222,704 92,222,704 73,058,944 73,058,944
Other borrowings 7,450,477 7,450,477 1,050,000 1,050,000
Accrued interest payable 1,056,858 1,056,858 734,941 734,941
Off-balance sheet instruments -- 99,436 -- 68,408
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value. These fair values are provided for disclosure
purposes only and do not impact carrying values of financial statement
amounts.
Cash and Cash Equivalents - The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values,
which includes cash and due from banks.
Federal Funds Sold - The carrying amount for federal funds sold
approximate those assets' fair value.
Investment Securities (including mortgage-backed securities) - Fair values
for securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Federal Home Loan and Federal Reserve Bank Stock - The carrying amount for
these securities approximates fair value.
Loans - For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently offered for loans with
similar terms to borrowers of similar credit quality.
Mortgage Servicing Rights - The fair value of mortgage servicing rights
are estimated using discounted cash flows based on a current market
interest rate.
Accrued Interest - The carrying amounts of accrued interest approximate
their fair values.
Defined Maturity Deposits - The fair value for defined maturity deposits,
primarily certificates of deposit, is calculated by discounting future
cash flows to their present value. Future cash flows, consisting of
principal and interest payments, are discounted using rates offered on
similar instruments based on the remaining maturity.
Undefined Maturity Deposits - The fair value of undefined maturity
deposits is equal to the carrying value and includes demand deposits,
savings accounts, NOW accounts and money market deposit accounts.
Other Borrowings - The carrying amounts of other borrowings approximate
their fair values.
Off-Balance Sheet Instruments - Fair values for off-balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
-20-
<PAGE> 55
agreements and the counterparties' credit standings. The fees charged for
financial futures contracts are also representative of the fair value of
such contracts.
18. PARENT COMPANY ONLY FINANCIAL INFORMATION
Financial information for Franklin Financial Corporation (parent company)
as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 is as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash $ 20,259 $ 72,487
Investment in subsidiary 19,785,056 14,487,059
Other 1,379,247 344,851
----------- -----------
TOTAL $21,184,562 $14,904,397
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 3,394,890 $ 1,400,182
Stockholders' equity 17,789,672 13,504,215
----------- -----------
TOTAL $21,184,562 $14,904,397
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME 1997 1996 1995
<S> <C> <C> <C>
INCOME:
Management fees $ 164,248 $ 72,000 $ 68,000
Interest income 2,016 6,379 11,726
---------- ---------- ----------
166,264 78,379 79,726
EXPENSES:
Interest expense 218,336 32,335 --
Salaries and employee benefits 23,336 34,868 33,026
Other 147,039 82,495 60,355
---------- ---------- ----------
388,711 149,698 93,381
LOSS BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY (222,447) (71,319) (13,655)
INCOME TAX BENEFIT 75,631 24,207 4,916
---------- ---------- ----------
LOSS BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS
OF SUBSIDIARY (146,816) (47,112) (8,739)
EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY 4,035,287 2,612,597 1,132,005
---------- ---------- ----------
NET INCOME $3,888,471 $2,565,485 $1,123,266
========== ========== ==========
</TABLE>
-21-
<PAGE> 56
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS: 1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 3,888,471 $ 2,565,485 $ 1,123,266
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 23,141 -- --
Equity in undistributed earnings
of subsidiary (4,035,287) (2,612,597) (1,132,005)
(Increase) decrease in other assets (72,997) 44,721 (215,992)
Increase in other liabilities 15,167 125,526 211,076
----------- ----------- -----------
Net cash (used in) provided by
operating activities (181,505) 123,135 (13,655)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of premises and equipment (984,540) -- --
----------- ----------- -----------
Net cash used in investing activities (984,540) -- --
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from issuance of
common stock 234,276 115,278 17,178
Purchase of subsidiary stock (1,100,000) (1,400,000) (100,000)
Proceeds from borrowings 1,979,541 1,050,000 --
----------- ----------- -----------
Net cash provided by (used in)
financing activities 1,113,817 (234,722) (82,822)
----------- ----------- -----------
NET DECREASE IN CASH (52,228) (111,587) (96,477)
CASH AT BEGINNING OF YEAR 72,487 184,074 280,551
----------- ----------- -----------
CASH AT END OF YEAR $ 20,259 $ 72,487 $ 184,074
=========== =========== ===========
</TABLE>
19. SUBSEQUENT EVENT
During January 1998, the Company's Board of Directors approved a
two-for-one stock split payable on February 19, 1998 to shareholders of
record at the close of business on February 2, 1998. The consolidated
balance sheets and statements of stockholders' equity reflect the split as
if the split had occurred on December 31, 1997. All previously reported
per share and weighted average share information has been retroactively
restated as if the split had occurred at the beginning of the years
presented.
- 22 -
<PAGE> 57
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no occurrence requiring a response to this item.
PART III
ITEM 9. DIRECTORS. EXECUTIVE OFFICERS. PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company and the Bank are as follows:
<TABLE>
<CAPTION>
Position Position
Name with Company with Bank
---- ------------ ---------
<S> <C> <C>
Joseph H. Bowman, IV - Executive Vice President
and Director
James W. Cross, IV - Director
Richard E. Herrington President, Chief Executive Chief Financial Officer
Officer and Director and Director
Gordon E. Inman Chairman of the Board Chairman of the Board
J. Myers Jones, III - President, Chief Executive
Officer and Director
Charles R. Lanier Director Executive Vice President
and Director
George M. Miller - Director
D. Edward Moody - Director
Lisa Musgrove - Vice President
and Comptroller
Houston Naron, Jr. - Director
D. Wilson Overton Director Director
Edward M. Richey Director Director
Edward P. Silva Director Director
Melody J. Smiley - Director
Richard D. White - Director
</TABLE>
-57-
<PAGE> 58
Each of the above directors of the Company (other than Mr. Lanier) has
been a director of the Company since December 1988. Charles R. Lanier has been a
director of the Company since August 1989. Each director of the Company serves
for a term of one year and is elected at the Company's Annual Meeting of
Shareholders. The company's officers are appointed by its Board of Directors and
hold office at the will of the Board. Bank directors serve for a term of one
year and are elected at the Bank's Annual Meeting of Shareholders.
JOSEPH H. BOWMAN, IV, age 50, has served as Executive Vice
President/Senior Loan Officer of the Bank since July 1991. From 1976 to 1991,
Mr. Bowman served in various capacities with Sovran Bank (formerly Williamson
County Bank), including most recently as Senior Vice President.
JAMES W. CROSS, IV, age 34, has served as the President and owner of
Century Construction Company, a developer and general contractor, since 1988.
Mr. Cross has served as a director of the Bank since September 1994.
RICHARD E. HERRINGTON, age 50, has served as President and Chief
Executive Officer of the Company since December 1988 and of the Bank from May
1989 to July 1992. From 1985 to 1988, Mr. Herrington served as President of
Security Information Systems, Inc., a subsidiary of Security Federal Savings and
Loan, Nashville, Tennessee.
GORDON E. INMAN, age 59. has served as Chairman of the Board of the
Company since December 1988 and of the Bank since May 1989. In addition, Mr.
Inman was the owner of Inman Realtors, a real estate brokerage firm from 1979 to
1996.
J. MYERS JONES, III, age 47, has served as President and Chief
Executive Officer of the Bank since August 1992. From 1989 to 1992, Mr. Jones
served as County Executive Officer of NationsBank of Tennessee, N.A. From 1988
to 1989, he served as Senior Credit Officer of Sovran Bank/Williamson County,
and from 1986 to 1988, he served as Senior Credit Officer of Sovran
Bank/Eastern.
CHARLES R. LANIER, age 41, has served as Executive Vice President of
the Bank since July 1989. Mr. Lanier served in various capacities with Sovran
Bank (formerly Williamson County Bank) in Williamson County, Tennessee from 1978
to 1989, including most recently. Assistant Vice President for Commercial
Lending.
GEORGE M. MILLER, age 66, has served as President and Chief Executive
Officer of the United Methodist Foundation for Christian Higher Education since
1995. From 1992 to 1995 he served as Executive Director of the Nashville Zoo.
From 1972 to 1992 Mr. Miller served in various banking capacities, including
most recently Senior Vice President at NationsBank. Mr. Miller has served as a
director of the Bank since April 1996.
D. EDWARD MOODY, age 77, has been the owner of Moody's Tire Company
since 1944. Mr. Moody is also a Trustee of Belmont University in Nashville.
Tennessee.
LISA MUSGROVE, age 35, has served as Vice President and Comptroller of
the Bank since July 1994. Ms. Musgrove served in various capacities with
Tennessee National Bank from 1989 to 1994, including most recently, Vice
President, Controller and Treasurer.
N. HOUSTON NARON, JR., age 51, has served as principal and partner of
Employee Benefit Services of Franklin, an employee benefits consulting firm,
since 1994. From 1989 to 1994, Mr. Naron served as director of benefits of
Nissan Motors USA. Inc., an auto manufacturer. Mr. Naron has served as a
director of the Bank since September 1994.
D. WILSON OVERTON, age 48, is a Certified Public Accountant and has
been a shareholder and a director of Williams, Crosslin, Sparks & Vaden, P.C.
since September 1996. From 1992 to September 1996, Mr. Overton was a shareholder
in the regional accounting firm of Home CPA Group, a professional association.
From 1991 to 1992, Mr. Overton was a partner in the accounting firm of Yeary,
Howell, Overton & Michie, CPA's. Form 1989 to 1991, Mr. Overton was the owner of
D. Wilson Overton, CPA, and from 1984 to 1989, he was associated with the firm
of Wilson, Work, Fossett & Greer, CPA's.
-58-
<PAGE> 59
EDWARD M. RICHEY, age 46, has been the owner and a director of Goodman,
Inman & Richey, Inc., a Nutrisystem, Inc. weight loss center franchisee, since
1979, and served as its President from 1979 to 1986. In addition, Mr. Richey has
served as President of Richey Insurance Service, Inc. since 1976.
EDWARD P. SILVA, age 55, is an attorney-at-law who has been a partner
in the law firm of Hartzog, Silva & Davies since 1974.
MELODY J. SMILEY, age 45, is a Certified Public Accountant and has
owned her local accounting practice since 1986.
RICHARD D. WHITE, age 46, has been the Senior Pastor of the First
Baptist Church of Franklin for the past 14 years. Mr. White has served as a
director of the Bank since April 1994.
There are no family relationships between any director or executive officer and
any other director or executive officer of the Company.
The Company is not subject to the requirements of Section 16 of the Securities
Exchange Act of 1934, as amended.
-59-
<PAGE> 60
ITEM 10. EXECUTIVE COMPENSATION.
The following table provides certain summary information for the fiscal
years ended December 31,1997, 1996 and 1995 concerning compensation paid or
accrued by the Company to or on behalf of the Company's Chief Executive Officer
and the other executive officers of the Company who earned more than $100,000
during fiscal 1997 (together with the Chief Executive Officer, the "Named
Executive Officers').
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Number
of
Name and Annual Compensation Options All Other
Principal Position Year Salary Bonus Awarded Compensation(1)
- ------------------ ---- -------- ------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Gordon E. Inman 1997 $163,114 $ -- 226,000 $24,235(2)
Chairman of 1996 158,363 -- 205,000 21,415(3)
the Board 1995 154,500 3,000 30,000 18,238(4)
Richard E. Herrington 1997 $116,713 $ -- 80,000 $ 5,794
President and Chief 1996 110,917 -- 60,000 5,458
Executive Officer 1995 106,421 2,000 10,000 2,117
J. Myers Jones 1997 $115,163 $ -- 40,000 $ 3,022
Bank President 1996 110,790 -- 40,000 3,296
1995 109,609 4,000 -- 2,135
</TABLE>
(1) Except as set forth in Notes 2, 3 and 4, all amounts included
in All Other Compensation" represent matching contributions
under the Company's 401(k) plan.
(2) Includes $12,143 paid in 1997 to Mr. Inman in lieu of
cafeteria plan benefits and $2,742 in matching contributions
under the Company's 401(k) plan. Also includes the value of
275 shares of common stock granted to Mr. Inman as
compensation for his service as a director of the Company and
the Bank ($6,050) and a $3,300 auto allowance.
(3) Includes $13,208 paid in 1996 to Mr. Inman in lieu of
cafeteria plan benefits and $3,167 in matching contributions
under the Company's 401(k) plan. Also includes the value of
280 shares of common stock granted to Mr. Inman as
compensation for his service as a director of the Company and
the Bank ($5,040).
(4) Includes $12,898 paid in 1995 to Mr. Inman in lieu of
cafeteria plan benefits, $3,090 in matching contributions
under the Company's 401(k) plan and a $2,250 auto allowance.
Although the directors of the Company did not receive any cash
compensation for their service as directors in 1997, the Company issued 40
shares of common stock to each outside director of the Company as compensation
for their service as directors of the Company during 1997. Gordon Inman and
Richard Herrington received 250 shares of common stock and 150 shares of common
stock, respectively, as compensation for their service as directors of the
Company. The Bank's outside directors currently receive a fee of $600 per month.
In addition, each director of the Bank (other than J. Myers Jones) was issued 25
shares of common stock as compensation for their service as directors of the
Bank during 1997. Mr. Jones was issued 1,000 shares of common stock as
compensation for his service as a director of the Bank during 1997. Compensation
to be paid to the directors of the Company and the Bank for fiscal 1998 has not
yet been established.
-60-
<PAGE> 61
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Gordon E.
Inman, pursuant to which Mr. Inman serves as Chairman of the Board. The
employment agreement is for a term of five years, expiring on December 31, 1999,
and provides for automatic renewal for a period of one additional year unless
the Company gives prior written notice that the agreement shall not be so
extended. The agreement provides for Mr. Imnan to be paid an initial annual base
salary of $150,000, with the amount of such base salary to be adjusted annually
in accordance with changes in the Consumer Price Index. The agreement also
provides for the annual grant of stock options to Mr. Inman in accordance with a
predetermined formula. Such options are to be granted by the Board of Directors
of the Company. The agreement also provides for Mr. Inman to receive an
automobile, as well as health, disability and life insurance.
INCENTIVE STOCK OPTION PLAN
On April 19, 1990, the Company's shareholders adopted an Incentive
Stock Option Plan (the "Plan") for employees who are contributing significantly
to the management or operation of the business of the Company or its
subsidiaries as determined by the Company's Board of Directors or the committee
administering the Plan. The Plan provides for the grant of incentive and
non-qualified stock options to purchase up to 3,000,000 shares of Common Stock
at the discretion of the Board of Directors of the Company or a committee
designated by the Board of Directors to administer the Plan. The option exercise
price of incentive stock options must be at least 100% (110% in the case of a
holder of 10% or more of the Common Stock) of the fair market value of the stock
on the date the option is granted and the options are exercisable by the holder
thereof in full at any time prior to their expiration in accordance with the
terms of the Plan. Incentive stock options granted pursuant to the Plan will
expire on or before (1) the date which is the tenth anniversary of the date the
option is granted, or (2) the date which is the fifth anniversary of the date
the option is granted in the event that the option is granted to a key employee
who owns more than 10% of the total combined voting power of all classes of
stock of the Company or any subsidiary of the Company.
The following table provides certain information concerning individual
grants of stock options made during the fiscal year ended December 31, 1997 to
each of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------
% OF TOTAL OPTIONS
OPTIONS GRANTED TO EXERCISE OR
NAME GRANTED EMPLOYEES IN FISCAL BASE PRICE EXPIRATION
- --------- (#) YEAR ($ PER SHARE) DATE
------- ------------------- ------------- ----------
<S> <C> <C> <C> <C>
Gordon E. Inman 226,000 44.5 4.50 2/14/12
Richard E. Herrington 80,000 15.8 4.50 2/14/07
J. Myers Jones 40,000 7.9 4.50 2/14/07
</TABLE>
-61-
<PAGE> 62
The following table presents information regarding options exercised
during 1997 and the value of unexercised options and warrants held at December
31, 1997 by the Named Executive Officers. No other stock options or warrants
were exercised by the Named Executive Officers and there were no SARs
outstanding during fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT FY-END (#) IN-THE-MONEY OPTIONS
------------- AT FY-END(1)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ----------- ------------------- --------------------
<S> <C> <C> <C> <C>
Gordon E. Inman -- -- 886,116(2)/0 $7,941,158/$0
Richard E. Herrington 2,000 $21,000 205,232(3)/0 1,725,343/0
J. Myers Jones -- -- 96,840/0 790,505/0
</TABLE>
(1) Dollar values calculated by determining the difference between the
estimated fair market value of the Company's Common Stock at December
31, 1997 ($11.50) and the exercise price of such warrants and options.
(2) Includes 385,952 stock purchase warrants granted in connection with the
Company's initial stock offering.
(3) Includes 28,948 stock purchase warrants granted in connection with the
Company's initial stock offering.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 15,
1998 with respect to ownership of the outstanding Common Stock of the Company by
(i) all persons known to the Company to own beneficially more than 5% of the
outstanding shares of the Common Stock of the Company, (ii) each director of the
Company, (iii) each Named Executive Officer and (iv) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING SHARES
- ---------------- -------------------- ------------------
<S> <C> <C>
Joseph H. Bowman, IV (1) 173,478 2.4%
Richard E. Herrington (2) 306,864 4.2
Gordon E. Inman (3) 4,123,006 51.0
J. Myers Jones (4) 177,972 2.5
Charles R. Lanier (5) 79,632 1.1
D. Wilson Overton (6) 74,970 1.1
Edward M. Richey (7) 1,092,322 15.4
Edward P. Silva (8) 65,902 1.0
All executive officers and directors
as a group (8 persons) 6,094,146 69.4
</TABLE>
-62-
<PAGE> 63
Except as otherwise indicated, each person named in this table
possesses sole voting and investment power with respect to the shares
beneficially owned by such person. "Beneficial Ownership" includes shares for
which an individual, directly or indirectly, has or shares voting or investment
power or both and also includes warrants and options which are exercisable
within sixty days of the date hereof. Beneficial ownership as reported in the
above table has been determined in accordance with Rule 13d-3 of the Securities
Exchange Act of 1934. The percentages are based upon 6,995,562 shares
outstanding, except for certain parties who hold presently exercisable warrants
or options to purchase shares. The percentages for those parties who hold
presently exercisable warrants or options are based upon the sum of 6,995,562
shares plus the number of shares subject to presently exercisable warrants or
options held by them, as indicated in the following notes.
(1) Includes 157,268 shares subject to presently exercisable stock options.
(2) Includes 28,948 shares subject to presently exercisable stock purchase
warrants granted in connection with the Company's initial stock
offering and 220,284 shares subject to presently exercisable stock
options. Also includes 1628 shares held by the individual retirement
account of Mr. Herrington' s wife.
(3) Includes 385,952 shares subject to presently exercisable stock purchase
warrants granted in connection with the Company's initial stock
offering and 700,164 shares subject to presently exercisable stock
options. Mr. Inman's address is 215 Sturbridge Drive, Franklin,
Tennessee 37064.
(4) Includes 120,840 shares subject to the presently exercisable stock
options.
(5) Includes 40,692 shares subject to presently exercisable stock options.
(6) Includes 19,296 shares subject to presently exercisable stock purchase
warrants granted in connection with the Company's initial stock
offering.
(7) Includes 96,488 shares subject to presently exercisable stock purchase
warrants granted in connection with the Company's initial stock
offering. Mr. Richey owns 871,514 shares individually and 124,320
shares are owned by Richey Insurance Company, an entity owned by
Mr. Richey. Mr. Richey's address is 6448 Worchester Drive, Nashville,
Tennessee 37221.
(8) Includes 19,296 shares subject to presently exercisable stock purchase
warrants granted in connection with the Company's initial stock
offering.
There are no arrangements known to the Company, the operation of which
may at a subsequent date, result in a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In January 1989, the organizers of the Company entered into an
agreement with Gordon E. Inman, the Chairman of the Board of the Company and the
Bank, to lease a two-story office building and property located adjacent to
same. Since 1989, the Company and Mr. Inman entered into several addendums to
the lease agreement providing for the lease of additional space in the building.
The monthly rental on the office building is presently $30,130, with increases
to be made on an annual basis based on any increase in the Consumer Price Index
(CPU') during the previous year. The ground lease with respect to the property
adjacent to the building requires that the Company pay a monthly rental of $566,
with increases to be made on an annual basis based on the increase in the CPI
during the previous year. In December 1993, the Bank entered into an agreement
wit Mr. Inman for the lease of office/warehouse space on Main Street in
Franklin, Tennessee. The monthly rental on this facility is presently $5,305,
with increases to be made on an annual basis based on any increase in the CPI
during the previous year. Lease payments to Mr. Inman by the Company with
respect to such properties totalled $390,206 during 1997 and $300,028 during
1996.
-63-
<PAGE> 64
Century Construction Company, a general contractor owned and
controlled by James W. Cross, IV, a director of the Bank, served as general
contractor in connection with the construction of the Bank's operations center,
Franklin Financial Center and Fairview branch facility during 1997 and 1996.
Payments by the Bank to Century Construction Company, which includes payment for
services rendered by unrelated sub-contractors, totalled $414,567 in 1997 and
$22,572 in 1996.
The Bank had outstanding loans to certain of the Company's directors,
executive officers, their associates and members of the immediate families of
such directors and executive officers. These loans were made in the ordinary
course of business, were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with persons not affiliated with the Company or the Bank and did
not involve more than the normal risk of collectibility or present other
unfavorable features.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed with or
incorporated by reference into this report. The exhibits which
are denominated by an asterisk (*) were previously filed as a
part of, and are hereby incorporated by reference from either
(i) a Registration Statement on Form S-18 under the Securities
Act of 1933 for the Registrant, Registration No. 33-21232-A
(referred to as "S-18"), (ii) the Annual Report on Form 10-K
for the year ended December 31, 1989 for the Registrant
(referred to as "1989 10-K"), (iii) the Annual Report on Form
10-K for the year ended December 31, 1990 for the Registrant
(referred to as "1990 10-K"), (iv) the Annual Report on Form
10-K for the year ended December 31, 1991 for the Registrant
(referred to as "1991 10-K"), (v) the Registration Statement
on Form S-2 (File No. 33-75678) of the Registrant (referred to
as "S-2"), (vi) the Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1994 (referred to as "1994
10-QSB"), (vii) the Quarterly Report on Form 10-QSB, the
quarter ended June 30, 1995 (referred to as "1995 10-QSB"),
(viii) the Annual Report on Form 10-KSB for the year ended
December 31, 1995 (referred to as "1995 10-KSB") and (ix) the
Annual Report on Form 10-KSB for the year ended December 31,
1996 (referred to as "1996 10-KSB"). The exhibit number
corresponds to the exhibit number in the referenced document.
<TABLE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
*3.1 - Charter dated December 27, 1988 (S-18).
*3.2 - Amended and Restated Charter dated February 16, 1989 (S-18).
3.2.1 - Articles of Amendment dated May 20, 1997.
*3.3 - By-Laws adopted December 30, 1988 (S-18).
*10.1 - Lease Agreement dated January 5, 1989 among Steven G. Hall, Lawson H.
Hardwick, III, Richard E. Herrington, Gordon E. Inman, D. Wilson
Overton, Harold W. Pierce, Edward M. Richey and Edward P. Silva, and
Gordon E. Inman for lease of offices at 230 Public Square, Franklin,
Tennessee (S-18).
*10.2 - Lease Agreement dated January 5, 1989 among Steven G. Hall, Lawson H.
Hardwick, III, Richard E. Herrington, Gordon E. Inman, D. Wilson
Overton, Harold W. Pierce, Edward M. Richey and Edward P. Silva. and
Gordon E. Inman for lease of land at 216A and 216B East Main Street,
Franklin, Tennessee (S-18).
*10.3 - Demolition and Relocation Agreement dated January 5, 1989 among
Steven G. Hall, Lawson H. Hardwick, III, Richard E. Herringion, Gordon
E. Inman, D. Wilson Overton, Harold W. Pierce, Edward M. Richey and
Edward P. Silva, and Gordon E. Inman (S-18).
</TABLE>
-64-
<PAGE> 65
<TABLE>
<S> <C>
*10.8 -1990 Incentive Stock Option Plan of Registrant, (1989 10-K).
*10.8.1 -Amendment No. 1 to 1990 Incentive Stock Option Plan (1995 10-KSB).
*10.9 -Contract For Sale of Real Estate dated November 7, 1990 between
Dominion Bank and Edward M. Richey regarding purchase of property at
the intersection of Beasley Drive and Highway 31 South, Franklin,
Tennessee (1990 10-K).
*10.10 -Second Amendment to Lease Agreement dated December 3, 1990 between
Gordon E. Inman and Franklin Financial Corporation for lease of
additional office space in Franklin, Tennessee (1991 10-K).
*10.11 -Option for Sale of Real Estate dated May 1, 1990 in connection with an
office building located in Spring Hill, Tennessee (1991 10-K).
*10.12.1 -Loan Agreement dated December 29, 1995 by and between the Registrant
and First American National Bank (1995 10-KSB).
*10.12.2 -Second Master Promissory Note and Loan Agreement Modification dated
December 29, 1995 by and between the Registrant and First American
National Bank. (1995 10-KSB).
*10.12.3 -Third Loan Agreement Modification dated January 31, 1997 by and
between the Registrant and First American National Bank. (1996 10-KSB)
*10.12.4 -Master Promissory Note dated January 31, 1997 from the Registrant to
First American National Bank in the principal amount of $6,000,000.
(1996 10-KSB)
*10.13 -Third amendment to Lease Agreement dated December 3, 1990 between
Gordon B. Inman and Franklin Financial Corporation for lease of
additional office space in Franklin, Tennessee (S-2).
*10.14 -Lease Agreement dated December 16, 1993 by and between Gordon E.
Inman and Franklin National Bank for lease of operations center at 334
Main Street, Franklin, Tennessee (S-2).
*10.14.1 -First Amendment to Lease Agreement dated January 16, 1996 by and
between Gordon B. Inman and Franklin National Bank for lease of
additional office space in operations center. (1995 10-KSB).
*10.15 -Lease Agreement dated August 16, 1993 between CNL Income Fund V. Ltd.
and Franklin National Bank for lease of office space at the Williamson
Square Center in Franklin, Tennessee (S-2).
*10.16 -Agreement for Assignment of Lease, dated July 21, 1994, by and
between First Union National Bank of Tennessee and Franklin National
Bank regarding lease of property in Brentwood, Tennessee (1994 10-QSB).
*10.17 -Employment Agreement dated January 17, 1995 by and between Franklin
Financial Corporation and Gordon E. Inman (1995 10-QSB).
10.18 -Fourth amendment to Lease Agreement dated December 3, 1990 between
Gordon E. Inman and Franklin Financial Corporation for lease of
additional office space in Franklin, Tennessee.
*21.1 -Subsidiaries of the Registrant (1990 10-K, Exhibit 22.1)
23.1 -Consent of Deloitte & Touche LLP.
23.2 -Consent of Heathcott & Mullaly P.C.
</TABLE>
-65-
<PAGE> 66
27.1 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended December 31, 1997.
-66-
<PAGE> 67
SIGNATURES
Pursuant to the requirements of Section 15(d) 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
Date: March 25, 1998 By:/S/ Richard E. Herrington
-------------------------------------------
Richard E. Herrington
President and Chief Executive Officer
(principal executive and financial officer)
Date: March 25, 1998 By:/S/ Lisa Musgrove
-------------------------------------------
Lisa Musgrove
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ Richard E. Herrington President, Chief March 25, 1998
- ------------------------------ Executive Officer
Richard E. Herrington and Director
/S/ Gordon E. Inman Chairman of March 25, 1998
- ------------------------------ the Board
Gordon E. Inman
/S/ Charles R. Lanier Director March 25, 1998
- ------------------------------
Charles R. Lanier
/S/ D. Wilson Overton Director March 25, 1998
- ------------------------------
D. Wilson Overton
/S/ Edward M. Richey Director March 25, 1998
- ------------------------------
Edward M. Richey
/S/ Edward P. Silva Director March 25, 1998
- ------------------------------
Edward P. Silva
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
An annual report and proxy materials will be furnished to security holders
subsequent to the filing of this Annual Report on Form 1O-KSB, and the
Registrant will furnish copies of such material to the Commission when they are
sent to security holders.
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
3.2.1 Articles of Amendment dated May 20, 1997.
10.18 Fourth amendment to Lease Agreement dated December 3, 1990 between
Gordon E. Inman and Franklin Financial Corporation for lease of
additional office space in Franklin, Tennessee.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Heathcott & Mullaly, P.C.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE> 1
Exhibit Number 3.2.1
Articles of Amendment
<PAGE> 2
ARTICLES OF AMENDMENT
OF FRANKLIN FINANCIAL CORPORATION
1.
The name of the corporation is Franklin Financial Corporation.
2.
The charter of the corporation shall be amended by deleting Article IV
thereof in its entirety and substituting the following in lieu of Article IV:
"IV.
The Corporation shall have authority to issue 10,000,000
shares of common stock having no par value, designated "common
stock". The holders of common stock shall have unlimited
voting rights, in that such holders shall be entitled to elect
all of the members of the Board of Directors of the
Corporation and shall be entitled to vote as a class on all
matters required or permitted to be submitted to the
shareholders of the Corporation. The holders of common stock
shall have the right to receive the net assets of the
Corporation upon dissolution."
3.
The amendment set forth in paragraph 2 of these Articles of Amendment
was adopted on April 15, 1997 by the Board of Directors of the Corporation.
4.
The amendment set forth in paragraph 2 of these Articles of Amendment
was duly adopted by the shareholders of the Corporation on May 20, 1997 in
accordance with the provisions of Code Section 48-20-103 of the Tennessee
Business Corporation Act.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to be executed by Richard E. Herrington, President and Chief Executive
Officer of the Corporation, on this 20th day of May, 1997.
FRANKLIN FINANCIAL CORPORATION
By: /s/ Richard E. Herrington
--------------------------------
Richard E. Herrington, President
and Chief Executive Officer
<PAGE> 1
Exhibit Number 10.18
Fourth Amendment to Lease Agreement
<PAGE> 2
FOURTH AMENDMENT TO LEASE AGREEMENT
THIS FOURTH AMENDMENT TO LEASE AGREEMENT is made and entered into by
and between Gordon E. Inman, a citizen and resident of Franklin, Tennessee, with
an address for purposes of this Fourth Amendment to Lease Agreement of Public
Square, Franklin, Tennessee, 37064 (hereinafter referred to as "Lessor"), and
Franklin Financial Corporation, that certain banking holding company organized
under the laws of the State of Tennessee, which operates as Franklin National
Bank and also with an address for purposes of this Fourth Amendment to Lease
Agreement of Public Square, Franklin, Tennessee, 37064 (hereinafter collectively
referred to as "Lessee" and is entered into pursuant to the following terms,
conditions and provisions.
WITNESSETH:
WHEREAS, Lessor and Lessee entered into certain contractual agreements
pertaining to the location of Lessee upon and within various properties owned by
Lessor in Franklin, Williamson County, Tennessee; and
WHEREAS, more particularly Lessor and Lessee entered into a Lease
Agreement as pertains to the demised premises located at 230 Public Square
(Building One), and 218 A and B Public Square (collectively Building Two),
Franklin, Williamson County, Tennessee (hereinafter referred to as the "Lease
Agreement"), being dated January 5, 1989, and reference to which is hereby made;
and
WHEREAS, Lessor and Lessee also entered in to a Ground Lease Agreement
as pertains to the lease of ground space with a physical address of 216 A and B
East Main Street, Franklin, Williamson County, Tennessee (hereinafter referred
to as the "Ground Lease Agreement") such also being executed on January 5, 1989,
and reference to which is hereby made; and
WHEREAS, Lessor and Lessee entered into an Agreement pertaining to the
demolition of certain building located at 216 A and B East Main Street
(hereinafter referred to as the "Demolition Agreement"), such also being
executed on January 5, 1989, and reference to which is hereby made; and
1
<PAGE> 3
WHEREAS, Lessor and Lessee entered into a certain First Amendment to
Lease Agreement which memorialized the leasing by Lessee from Lessor of
additional lease space consisting of a portion of an additional building owned
by Lessor located at 232 Public Square, said additional space consisting of 836
square feet, and said First Amendment to Lease Agreement (hereinafter referred
to as the "First Amendment") being dated May 18, 1989, reference to which is
hereby made; and
WHEREAS, Lessor and Lessee entered into a certain Second Amendment to
Lease Agreement which memorialized the leasing by Lessee from Lessor of
additional space consisting of a portion of an additional building owned by
Lessor located at 232 Public Square (also referred to as the 229-232 Public
Square Building), said additional space consisting of 2,605 square feet, and
said Second Amendment to Lease Agreement (hereinafter referred to as the "Second
Amendment") being dated December 3, 1990, reference to which is hereby made; and
WHEREAS, Lessor and Lessee entered into a certain Third Amendment to
Lease Agreement which memorialized the leasing by Lessee from Lessor of
additional lease space consisting of 2,061 square feet in the adjoining building
known as 232 Public Square, but also referred to as the 229-232 Public Square
Building, and from time to time referred to as the Alexander Building, and said
Third Amendment to Lease Agreement (hereinafter referred to as the "Third
Amendment") being dated May 15, 1993, reference to which is hereby made; and
WHEREAS, Lessee has now requested of Lessor the opportunity of leasing
further additional space from Lessor this time consisting of 9,311 square feet
in the building known as 210 East Main Street, Franklin, Tennessee; and
WHEREAS, the parties hereto wish to memorialize the terms and
provisions under which the "Further Additional Lease Space" shall be leased by
Lessee from Lessor, and how the rental by Lessee of said "Further Lease Space"
will modify the terms and provisions of the original Lease Agreement dated
January 5, 1989, as amended by First Amendment dated May 18, 1989, by Second
Amendment dated December 3, 1990, and Third Amendment dated May 15, 1993;
2
<PAGE> 4
NOW THEREFORE, in consideration of Ten ($10.00) Dollars and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and in further consideration of the monetary sums to be paid
hereunder and also based upon the mutual covenants and conditions hereinafter
recited, the parties agree as follows:
1. Lessor hereby agrees to lease unto Lessee 9,311 additional square
feet in the building known as 210 East Main Street, Franklin, Tennessee, to
include approximately thirty-five (35) parking spaces, said additional demised
premises depicted on drawing attached hereto and made Exhibit J hereto.
2. The applicable rental for this "Further Additional Space" shall be
$127,545.00 per annum, calculated attached hereto as Exhibit K, said amount to
be added to the now current lease rental payments being made by Lessee unto
Lessor under the original Lease Agreement, and as amended by First, Second and
Third Amendments thereto, and with said payments to be made in the same time
increments as are now being made with regard to rental payments.
3. The rental increase formula set forth in the original Lease in
relationship to the Consumer Price Index shall also apply to the ":Further
Additional Lease Space". The CPI-U Index for May, 1997 shall be the denominator
and the numerator shall be the month of April immediately proceeding the
commencement of the Lease Year in question for the purpose of calculating the
rental increase under this Fourth Amendment to Lease Agreement.
4. The effective date of the lease or the "Further Additional Lease
Space" shall be May 1, 1997.
5. All of Lessee's obligations pertaining to insurance, taxes and
utilities shall be applicable to this "Further Additional Lease Space" on the
same basis applicable to the original demised premises, and as increased and
made applicable to the "Additional Lease Space" under the First, Second and
Third Amendments to the Lease Agreement, and as now further increased as
pertains to the "Further Additional Lease Space".
3
<PAGE> 5
6. Except as specifically modified, altered, or amended herein, the
terms and provisions of the Lease Agreement originally entered into by and
between Lessor and Lessee on January 5, 1989, and as amended through First
Amendment to Lease Agreement dated May 18, 1989, Second Amendment to Lease
Agreement dated December 3, 1990 and Third Amendment to Lease Agreement dated
May 15, 1993, shall remain in full force and effect.
7. The terms and provisions of this Fourth Amendment to Lease Agreement
shall inure to and be binding upon the parties hereto, their respective heirs,
successors and assigns.
IN WITNESS WHEREOF, THE FOURTH AMENDMENT TO LEASE AGREEMENT has been
executed by Gordon E. Inman ( in his capacity as Lessor) and by Franklin
Financial Corporation by and through its duly authorized representative , J.
Myers Jones as President of Franklin National Bank (in its capacity of Lessee)
on the date appearing across from their respective signatures, and with an
effective date hereof to be the first date of execution by the party.
LESSOR:
/s/ Gordon E. Inman May 1, 1997
- --------------------------------------- -----------------------------
GORDON E. INMAN DATE
LESSEE:
Franklin Financial Corporation
(and Franklin National Bank)
/s/ J. Myers Jones May 1, 1997
- -------------------------------------- -----------------------------
J. MYERS JONES, PRESIDENT DATE
4
<PAGE> 1
Exhibit Number 23.1
Consent of Deloitte & Touche LLP
<PAGE> 2
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-92824 on Form S-8 of our report dated February 16, 1998 appearing in the
Annual Report on Form 10-KSB of Franklin Financial Corporation for the year
ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 27, 1998
<PAGE> 1
Exhibit Number 23.2
Consent of Heathcott & Mullaly, P.C.
<PAGE> 2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (Registration No. 33-92824) of Franklin Financial Corporation of our
report dated March 13, 1997, appearing in the Annual Report on Form 10-KSB of
Franklin Financial Corporation for the year ended December 31, 1997.
/s/ Heathcott & Mullaly, P.C.
Brentwood, Tennessee
March 25, 1998
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